Shares of Alexza Pharmaceuticals (ALXA) soared to gains of more than 50% during premarket hours on Wednesday May 8 after announcing a licensing deal with Teva Pharmaceuticals (TEVA). The stock has since fallen lower by 20%, and is currently trading with gains of 8% compared to last Tuesday's close. Alexza Pharmaceuticals has seen a great year over the last 12 months, and might be a good investment choice with its valuation, following its deal with Teva.
Alexza, its Product, and Market Upside
Alexza Pharmaceuticals is a $75 million company trading with one-year gains of 13%, having institutional ownership of 44%. Judging by the valuation of the company, you might assume that it has a small pipeline or is a company with its latest candidate in Phase 2 testing. Albeit, the company actually recently had its first FDA-approved and EU-approved product, Adasuve.
Adasuve is the first approved Rx for non-invasive, rapid-onset therapy for agitation in patients with schizophrenia or bipolar disease. The company projects the U.S. hospital market opportunity (by itself) to be at least $225 million annually. Alexza has partnered with Grupo Ferrer Internacional, S.A. to market Adasuve in Europe, Latin America, Russia, and the Commonwealth of Independent States. In this market outside the U.S., sales potential is also great, perhaps even greater than in the U.S. Thus Alexza Pharmaceuticals has great upside for a company trading with a market cap of just $80 million with very little risk because of its partnership and sales potential.
A Comparison of Two Teva Deals
Prior to Wednesday, Alexza Pharmaceuticals did not have a partnership in the U.S., but completed a monstrous deal with Teva. I say monstrous because of how favorably it compares with other deals in biotechnology, specifically with Teva Pharmaceuticals. To speak more clearly, I am going to discuss one of the better performing biotechnology stocks of the last 16 months, a company that also reached an agreement with Teva Pharmaceuticals, a company that I recently covered in this article -- and that company is Galena Biopharma (GALE).
Galena Biopharma is a discovery stage biotechnology company testing its main product candidate, NeuVax, in a Phase 3 trial. Galena has a market capitalization of $225 million, but this is coming after a near 500% increase in value since January 2012. The company is one of the most controversial in biotechnology as many believe that its vaccine has no chance of working because it failed in Phase 2 trials and because the subgroup being tested was data-mined from the failed study. Galena has sold its upside to retail investors with "billion dollar potential" and connections to both Roche and Teva over the last year.
On December 4, 2012 Galena Biopharma announced a partnership with Teva Pharmaceuticals in its press release, "Galena Biopharma Announces Signature of Commercialization Partnership With Teva for Israel". I feel obligated to disclose my personal opinion in biotechnology regarding partnerships, and that is that a partnership and a large company's investment tells the investor a lot about a discovery stage biotechnology company's upside. In Galena's partnership no financial information was disclosed; it was only a partnership in Israel, and it wasn't actually with Teva Pharmaceuticals-- but rather a subsidiary of Teva called ABIC Marketing Limited.
While Galena has traded higher by almost 500% and has grown its market capitalization from $40 million to $225 million, it is still very affordable for a $35 billion company such as Teva. Teva could have easily acquired Galena-- or made a much larger U.S. or European partnership-- but instead just gave Galena Israel and most likely paid just pennies for the deal (or else Galena would have announced the financials). Hence this tells us a lot about what a company such as Teva thinks of Galena-- that is if Teva's partnership via ABIC Marketing Limited is any indication.
There's no denying that Galena gets the glory and the stock performance, having traded higher by more than 50% since the partnership announcement, but Alexza Pharmaceuticals is getting the better deal of confidence. Alexza's licensing deal screams faith on behalf of Teva, and could have been an acquisition if not for Alexza's European and Asian partnership. In the deal, Alexza will receive an upfront payment of $40 million (half its market cap) with eligibility for another $195 million (more than twice its market cap) in milestone payments. When you consider that Alexza already has a partnership with Grupo Ferrer, the combined fundamental outcome could be quite great for the company.
With an $80 million market cap and an approved product that will be launched globally, I think the upside is great for Alexza Pharmaceuticals. Some might think that, with Adasuve being marketed by two partners, peak sales upside is dim for Alexza Pharmaceuticals. However, it's relevant to note that Adasuve is based on the company's proprietary technology, the Staccato system.
The Staccato system is a drug delivery technology that increases the uptake of a drug by vaporizing excipient-free drugs. The technology has already been proven to be effective with Adasuve (using loxapine), but is also being tested in various trials for migraine headaches (potentially 50% of migraine sufferers), breakthrough pain, acute repetitive seizures, insomnia, and to help smokers quit. All of these products use the platform in combination with other drugs-- and by partnering with two companies, Alexza will not have the costs of launching a drug. The company will also have cash to prevent dilution and will be able to focus on developing the technology further into more lucrative markets. Thus I say: ALXA is a great investment and it could be one of the most undervalued stocks in the market.