With a big FDA decision expected to surprise investors in Zogenix (NASDAQ:ZGNX) any day now, it is important to take into consideration all arguments for and against this company. When the decision is announced there will be no going back, and it is likely that it will cause a big move on the stock price in either direction. This article will discuss key arguments on the both sides of the fence.
But first let's look at the current environment around Zogenix and see what a decision on their drug, Zohydro ER, means for the company.
Zogenix's core business strategy is to sell their needle-free DosePro technology for use with a variety of established drugs to be marketed together as drug-and-device combinations. The drug-and-device combo, however, will need a reformulation of the intended drug in order to be usable with the DosePro system. This means that each drug coupled with DosePro will require separate clinical trials and separate FDA reviews. Building a bigger business around their DosePro technology will require a lot of time and significant research and development costs.
Zogenix's first product, Sumavel DosePro, is a drug and device combo that uses the drug sumatriptan to treat migraines. It was approved in July 2009 but has since been unable to make Zogenix a profitable business. There are just over 12 million sumatriptan prescriptions written in the U.S. each year, and in 2012 Zogenix achieved just over 83,000 of those prescriptions, a market share of less than 1%.
This is where Zohydro comes in to play, and is part of the reason why the new drug is so important for the company and its shareholders.
There are several reasons Zogenix needed to develop Zohydro ER. Primarily, it provides a hedge for their business by diversifying the products they offer instead of having to rely solely on their DosePro technology. What makes Zohydro so important, especially for shareholders, is not that it diversifies Zogenix's product line but because it will allow Zogenix to break into a tremendous market.
In 2011, there were over 130 million prescriptions for products containing hydrocodone, and it is in fact the most widely prescribed drug in the U.S. by a long shot. According to Zogenix, roughly 1% market share of this business could bring in approximately $250 million in revenues. Clearly, Zohydro sales could amount to an enormous business for Zogenix, a sharp contrast to the mere 12 million prescriptions a year for sumatriptan.
But that's not all. Income from sales of Zohydro could bring the company into profitability, and has excellent implications for long term investors. Potential revenues from Zohydro could end up providing easy funding for future research and development of Zogenix's real intended business--DosePro and drug combinations--while reducing possible shareholder dilution in the future.
While it is certainly clear that approval or denial of Zohydro is going to play a very important role in the company's future, what isn't so clear is whether or not Zohydro will actually get an approval in the first round, if at all.
Following the advisory committee meeting on Zohydro, there was only a small glimmer of hope that it would get approved, despite an overwhelming "no" recommendation from the panel. Late last month, however, that glimmer of hope became a glare of hope as the stock ran up as much as 55%, its largest intraday increase since its IPO, on news that the FDA would have a brief delay on a decision for Zohydro. This was interpreted as positive news, and there are compelling arguments both for and against a possible approval for Zohydro.
Here is a brief presentation of important arguments as well as facts that may help make a last minute decision on the FDA play:
-FDA acknowledged a need for hydrocodone without acetaminophen. The FDA mentioned in the briefing documents to the committee members that acetaminophen can cause liver damage, and there have been documented deaths related to acetaminophen overdose. In 2011, the FDA requested that companies limit the amount of acetaminophen in their products and include warning labels about potential liver damage. There are currently no extended release pure hydrocodone drugs without acetaminophen available to patients with liver problems.
-The committee was biased and did not vote properly. Zohydro met all primary and secondary endpoints in the clinical trials, and the data suggested that side effects were consistent with other drugs in the same class. Regardless of the supporting data, the panel still could not conclude decisively that Zohydro was safe and effective, possibly reflecting a bias. Among the evidence supporting this argument are comments that were made by Dr. Bob Rappaport, Director of the FDA Division of Analgesics, Anesthetics, and Rheumatology Products. While the panel members voiced major concerns over the abuse potential with Zohydro, he pointed out that classification as a schedule 2 drug is intentionally designed for highly addictive drugs. He reminded the panelists a number of times that they were to judge Zohydro in contrast to similar drugs already on the market, and not base their votes on the class of drugs as a whole. Otherwise, he said, "You're punishing this company and this drug because of the sins of the previous developers and their products. And from a regulatory standpoint, that's not really something we can do." These comments tie in to the next case for approval:
-There are no regulatory grounds for denial. This is the ace in the pro-Zohydro deck of cards. The evidence comes from the discussion following the final vote, where panelists voted 2 for and 11 against approval of Zohydro--a big NO. The question they voted on was "Based on the data presented and discussed today, do the efficacy, safety, and risk-benefit profile of Zohydro ER support the approval of this application?". The discussion following this vote revealed that the panelists who voted no did not base their vote on the data presented but instead voted outside the regulatory framework. In FDA quick minutes released after the meeting it states that the panelists said the FDA should raise its standards for opioid applications and not approve extended release opioids without abuse resistant formulations. They also said that the FDA should improve the standard REMS for opioids. This calls into question that the panelists voted not based on Zohydro data, but rather on issues that don't fall within current regulation. The FDA has no current requirements to include abuse resistant features for opioid applications to be approved, and in fact has previously resisted a move to require opioids to be Abuse Deterrent while questioning the quality of such formulations. Moreover, Zogenix has no problems with the standard REMS for opioids that was introduced by the FDA in July 2012. Zogenix has actually gone beyond the standard REMS and has introduced even further measures to mitigate the risks associated with Zohydro.
-The FDA would not delay the decision if they were intent on following the panel's recommendation. In the days leading up to the March 1 Prescription Drug User Fee Act (PDUFA) date, it was announced that the FDA would not reach a decision by that date. The beaten Zogenix stock crawling near its all time lows suddenly rocketed skyward. For many, the news was a sign of an imminent approval. But for some, investors apparently failed Reading Comprehension 101 as the stock soared on what should have been bad news. However speculative in nature, it does beg the question: why would the FDA bother to delay the decision if they were certain to go with the panel recommendation? Were they going on vacation for a few weeks? Probably not. According to Zohydro believers, the delay means approval is actually still on the table for Zogenix. Worst case scenario it means that a Complete Response Letter is less certain now than when it was virtually priced into the stock as fact.
-"No means no, yes means maybe". An article by MD Becker Partners makes the point clearly: the FDA is even more strict than advisory panelists. The authors looked at 10 companies that got positive panel recommendations and 10 companies that got negative recommendations. Of the 10 positive recommendations, the FDA did not approve 50% of them(including one drug that had a unanimous vote to approve). Of the 10 negative panel recommendations, one company withdrew the application and resubmitted a new formulation before the FDA reached a decision. The FDA did not approve the other 9 applications. Only 20 application outcomes is a very small sample, but it reflects a real trend. The FDA is harder to win over than a panel. To be fair, I have been able to find just three instances where the FDA overturned a negative panel recommendation. Nonetheless, it is an extremely rare occurrence.
-Zohydro is 10 times more powerful than similar drugs, and is therefore far more dangerous. There are a number of concerns with Zohydro. It is supposed to be 10 times more powerful than similar drugs, which presents an unnecessary risk for development of opioid dependency, abuse, and overdose. Moreover, Zohydro is also extremely easy to use and abuse recreationally. Zohydro uses SODAS (Spheroidal Oral Drug Absorption System) technology for its extended relief properties, which can be easily crushed in order to be snorted or injected.
The SODAS system presents another issue that hasn't been mentioned very often. In a letter written by a doctor to the Anesthetic & Analgesic Drug Products Advisory Committee ((AADPAC)) for Zohydro, he says SODAS allows for what is called alcohol induced dose dumping, which in studies had released up to 80% of the morphine in Avinza(extended release product using SODAS) in under an hour when taken with alcohol. The drug Palladone (extended release hydromorphone for chronic moderate to severe pain) was taken off the market in 2005 due to dose dumping, which is potentially fatal.
Additionally, extended release formulations tend to be abused at a higher rate than immediate release opioids, according to the FDA. Extended release formulations are much more powerful and even easier to abuse, making Zohydro a potential target for addicts.
-Without abuse deterrence and/or tamper resistance, Zohydro is bound to become a repeat of the Oxycontin story. It's powerful, it's deadly, and it's bound to become popular. The FDA is charged with protecting the public health and perhaps the regulators would spare themselves a public embarrassment instead of allowing Zohydro to replace the old Oxycontin as a recreational drug of choice.
Oxycontin, Purdue Pharma's brand name oxycodone extended release pill had shifted in 2010 from original formulation to abuse deterrent formulation after widespread misuse and abuse. Since the reformulation there have been a number of reports that the rate of abuse has declined significantly, and one pharmacy robber didn't even want it.
-Changing regulatory landscape. The FDA has been under a lot of pressure lately to increase restrictions on opioid products. The Drug Enforcement Agency has been on a push to require all opioid combination products to be classified as schedule 2 drugs on a federal level. Big pharmaceutical companies like Purdue have also been mustering up all their power to convince the FDA to remove formulations that aren't tamper resistant from the market, and add regulation that tamper resistant formulations become the standard for opioid approval.
Recently, it looks like big pharma has Congress on their side --or in their pockets. Representative Bill Keating (D-MA) recently announced the introduction of the Stop Tampering Of Prescription Pills Act (STOPP) that, if approved, would force the FDA to deny new drug applications for orally administered opioids that do not have formulations of tamper or abuse resistance. It also states that if a listed drug begins to use a tamper resistant formulation, all similar drugs without such a measures would be pulled off the market for "safety reasons".
As stated before, it wouldn't seem likely that the FDA would approve Zohydro in light of strong evidence suggesting that it may end up getting pulled in a very short time. There is no question that opioid regulation looks ready to ramp up in the face of public outcry. It is very likely that if Zohydro is approved the FDA will be pounded by proponents of opioid legislation. The FDA is no stranger to accusations of corruption, incompetence and even protests outside headquarters.
On the negative side, the chances for approval really don't look good given the evidence. Statistically, the FDA agrees with a negative adcom vote just about 100% of the time, and while there has been a lot of negativity lately on opioids in the public, in the media, and in Washington, it doesn't seem likely that the FDA go their own way here. On the bright side, however, the situation for Zohydro is very unique. The negative argument simply doesn't fall in line with current regulation. Zogenix should not be punished for FDA incompetence and lack of regulation, and Zohydro should be held to the same standards as similar opioids, for which it has demonstrated consistency in clinical trials.
You are encouraged to draw your own conclusions, and despite all that could be said, there is no way to predict the actual outcome of the FDA review. Investing in FDA decisions are not for the risk averse.
Disclosure: I am long ZGNX. 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.