Seeking Alpha
, PropThink (317 clicks)
Long/short equity, deep value, event-driven, research analyst
Profile| Send Message|
( followers)  

By Jake King and Rajesh Patel, Ph.D.

Zogenix (NASDAQ:ZGNX) currently awaits an approval decision from the FDA on Zohydro ER (extended release), a hydrocodone bitartrate formulation that differs from existing hydrocodone products because it does not include acetaminophen (like Vicodin). But despite losing almost 60% of its dollar value since going public in 2010, we believe that Zogenix has yet to see the bottom, as evidence suggests that the FDA is on the verge of rejecting Zohydro ER based on its liability for abuse.

Zogenix submitted a New Drug Application for Zohydro ER in May of 2012. The application was accepted, but the FDA pushed the product in front of an advisory board for thorough review and set a March 1, 2013 PDUFA data. In December of 2012, the FDA's Anesthetic and Analgesic Drug Products Advisory Committee convened to assess Zohydro and voted against approving the drug (2 Yes, 11 No, and 1 Abstain), primarily due to Zohydro's lack of abuse-deterrence and concerns about the drug's long-term safety. The stock traded off sharply on the news but rallied three months later when the FDA indicated on February 26 (three days before the scheduled approval decision) that it would be delaying the approval decision for undisclosed reasons. Investors took this as a positive signal, assuming that the FDA was leaning in the direction of an approval despite the advisory panel's recommendation.

We believe that investors have it wrong, and that those holding out on Zohydro receiving FDA approval are in for a rude awakening, as the regulatory agency has made clear its stance on abuse-deterrence in analgesic products, specifically in the months following Zohydro's advisory panel vote against approval. The preponderance of evidence this year suggest that the FDA is more and more resistant to approving opioid products without abuse deterrent qualities, and as we'll demonstrate below, ZGNX could lose as much as 40% of its value when the FDA rejects Zohydro ER - that announcement should come any day.

FDA's Repeated Negative Outlook on Narcotics

First and foremost in the evidence against Zohydro, the FDA's Anesthetic and Analgesic Drug Products Advisory Committee has already voted against an approval (2 Yes, 11 No, 1 Abstain), and the FDA rarely skews from its advisory panels' "No" recommendations. During 2010 and 2011, of the nine "No" votes furnished by advisory panels, the FDA agreed with all of them, and from 2007 through 2010, the FDA flipped on only three "No" votes in 120 panel meetings. The statistics are clearly not in favor of Zogenix, particularly in light of the FDA's recently toughened outlook on narcotics that lack abuse resistant qualities. The panel's negative vote was based primarily on the safety of Zohydro ER when used long-term (chance of dependence and abuse) and the need for tamper-resistant narcotics. On Zohydro's efficacy (Is there enough evidence to suggest that Zohydro ER is effective for the management of moderate-to-severe chronic pain?), however, the panel was almost split (7 Yes, 6 No). The "No" votes hinged on the length of the pivotal trial, just 12 weeks. Panel members expressed concern that in a chronic patient population, 12 weeks wasn't enough time to demonstrate efficacy in a population that will almost certainly be using the drug for far longer. Efficacy aside, we believe that the FDA's final decision will stem from the fact the Zohydro ER is easily misused and abused; the FDA's recent regulatory action has been in concordance with this thesis.

On January 9, 2013, a month after the advisory panel voted against Zohydro's approval, the FDA issued draft guidance on abuse-deterrent opioids titled, "Guidance for Industry: Abuse-Deterrent Opioids - Evaluation and Labeling." The document makes clear that the FDA considers the development of abuse resistant products a high public health priority. FDA Commissioner Dr. Margaret Hamburg said alongside the document's release, "The FDA is extremely concerned about the inappropriate use of prescription opioids, which is a major public health challenge for our nation. This draft guidance is an important part of a larger effort by FDA aimed at preventing prescription drug abuse and misuse." Two weeks later, the Drug Safety and Risk Management Advisory Committee met to discuss hydrocone's abuse potential (Zohydro is hydrocodone). In a presentation to the committee, Sharon Walsh of the Center on Drug and Alcohol Research at the University of Kentucky demonstrated this abuse potential and concluded that hydrocodone "is only slightly less potent than oxycodone on subjective effects related to abuse potential" and that the compound is similar to comparator opioids, including morphine, hydromorphone and oxycodone. She came to similar conclusions in earlier studies, that "the abuse liability of these three commonly used opioids [hydrocodone, hydromorphone and oxycodone] does not differ substantially from one another." The committee ultimately voted in favor (19-10) of rescheduling hydrocodone from Schedule III (moderate-to-low potential for physical and psychological dependence) to Schedule II (high potential for abuse) of the Controlled Substances Act, substantiating the view that hydrocodone is just as prone to abuse as other narcotic painkillers.

Zogenix bulls often compare Zohydro ER to hydrocodone products with acetaminophen (Vicodin). They point to the Schedule III designation for hydrocodone/acetaminophen products, versus the proposed Schedule II for Zohydro as part of Zogenix's risk mitigation strategy. The real comparison, we believe, should be between Zohydro and oxycodone (OxyContin), which is also Schedule II but is still widely abused. However, the growing abuse of OxyContin has prompted the FDA to take action by barring oxycodone (OxyContin) formulations that do not contain abuse deterrents from entering the market, a key step in the agency's overall move towards abuse-resistant narcotics. On April 16, the FDA approved labeling changes to the abuse-deterrent reformulation of OxyContin, Purdue Pharma's blockbuster oxycodone product, and simultaneously ruled that original OxyContin was withdrawn from sale "for reasons of safety or effectiveness." The original formulation of OxyContin, which contained no abuse deterrents, was withdrawn from the market in 2010. But the important takeaway from the April approval is that in parallel, the FDA determined that the benefits of the original OxyContin no longer outweigh the risks, and that it would no longer accept or approve any abbreviated new drug applications (generics) for the original OxyContin. Not only has the FDA taken steps to guide the pharmaceutical industry in the direction of formulating narcotics with abuse-deterrents, but it has actively worked to keep narcotics that lack abuse-deterrents off the market.

Thus, we see three key pieces of evidence against Zohydro's approval:

  1. The FDA advisory panel voted against Zohydro ER's approval, nearly unanimously.
  2. The FDA made clear that hydrocodone is just as prone to abuse and dependency as other narcotics, supporting a tighter scheduling and stronger oversight.
  3. The FDA ruled that versions of OxyContin (oxycodone) that lack abuse deterrents will no longer be approved. In the same way, we expect that a new hydrocodone formulation that lacks abuse deterrents will not be approved.

Recall that the FDA delayed Zohydro's approval decision on February 26th. In our view, this was not, as some investors hope, greater evidence of an impending approval, but simply coincided with the agency finalizing guidance for other opioid products (original oxycontin), as well as weighing its recent vote to reschedule hydrocodone.

What It All Means

The FDA should have an approval decision for Zohydro ER any day now, and Zogenix shares hover around $1.70. When the FDA's Anesthetic and Analgesic Drug Products Advisory Committee voted against approving Zohydro ER in December, the stock fell as low as $1.11. After the FDA delayed the approval decision on Feb. 26, ZGNX rallied back to the $1.70-$2.00 range - we believe wrongly.

When Zohydro is rejected by the FDA, it's fair to assume the ZGNX trades back to its previous post-advisory panel lows around $1.11, but since this will be the veritable "final nail in the Zohydro coffin," a break below $1.00 would not come as a surprise.

Therefore, ZGNX could fall by approximately 40% upon the FDA's rejection of Zohydro.

It's also worth noting that on April 16, when the FDA ruled against older oxycontin formulations, ZGNX dropped just 7%. This should have had a much stronger effect on the stock and indicates that retail investors continue to believe in an approval (In contrast, Acura Pharmaceuticals (NASDAQ:ACUR), which develops abuse-deterrent technology for use in drugs, climbed 53%).

(click to enlarge)

The company does have two backdrops to this event: the approved migraine treatment Sumavel (which did $35.9M in revenue in 2012); and Relday, a Phase I risperidone injection for treating schizophrenia. Zogenix reported the results of a Phase I extension study on Thursday morning, and the stock popped by $.07 to $1.77 before trading back to $1.70 before the noon hour.

Overall, we expect that the FDA will reject Zohydro ER due to abuse and long-term safety risks, sending ZGNX down by as much as $0.70, or a 40% haircut.

Source: Zogenix Poised For 40% Haircut As Zohydro Decision Approaches

Additional disclosure: PropThink is a team of editors, analysts, and writers. This article was written by Jake King and Rajesh Patel. We did not receive compensation for this article, and we have no business relationship with any company whose stock is mentioned in this article. Use of PropThink’s research is at your own risk. You should do your own research and due diligence before making any investment decision with respect to securities covered herein. You should assume that as of the publication date of any report or letter, PropThink, LLC and persons or entities with whom it has relationships (collectively referred to as "PropThink") has a position in all stocks (and/or options of the stock) covered herein that is consistent with the position set forth in our research report. Following publication of any report or letter, PropThink intends to continue transacting in the securities covered herein, and we may be long, short, or neutral at any time hereafter regardless of our initial recommendation. To the best of our knowledge and belief, all information contained herein is accurate and reliable, and has been obtained from public sources we believe to be accurate and reliable, and not from company insiders or persons who have a relationship with company insiders. Our full disclaimer is available at www.propthink.com/disclaimer.