Alexza Expects 2nd Half Of 2013 And 2014 To Be Eventful

Aug.22.13 | About: Alexza Pharmaceuticals, (ALXA)

Alexza Pharmaceuticals (NASDAQ:ALXA) is focused on the research, development and commercialization of novel proprietary products for the acute treatment of central nervous system ("CNS") conditions. Alexza's product candidates are based on its proprietary technology, the Staccato® system.

During the past 11 months, Alexza has accomplished several important highlights, including:

  • On October 18, 2012, based upon Frost & Sullivan's analysis of the bipolar disorder therapeutics market, they recognized Alexza Pharmaceuticals with the 2012 Global Enabling Technology Award for its core proprietary technology - the Staccato® technology.
  • On December 21, 2012, the FDA approved ADASUVE (Staccato loxapine) Inhalation Powder 10 mg for the treatment of acute agitation associated with schizophrenia or bipolar I disorder in adults.
  • On February 21, 2013, the EMA granted marketing authorization, in the European Union ("EU"), for ADASUVE (Staccato loxapine), 4.5 mg and 9.1 mg inhalation powder, pre-dispensed, for the rapid control of mild-to-moderate agitation in adult patients with schizophrenia or bipolar disorder.
  • On May 8, 2013, Alexza and Teva Pharmaceuticals USA, a subsidiary of Teva Pharmaceutical Industries Ltd (NYSE:TEVA), announced that the companies have entered into an exclusive U.S. license and supply agreement for ADASUVE (loxapine) inhalation powder 10 mg for the acute treatment of agitation associated with schizophrenia or bipolar I disorder in adults. Teva will be responsible for all U.S. commercial and clinical activities for ADASUVE, including U.S. post-approval clinical studies, and has gained rights to conduct additional clinical trials of ADASUVE for potential new indications in neurological disorders. Alexza will be responsible for manufacturing and supplying ADASUVE to Teva for commercial sales and clinical trials. The deal is valued at up to $260 million, and it includes

    The deal is valued at up to $260 million. Alexza received an upfront cash payment of $40 million and is eligible to receive up to $195 million in additional milestone payments, based upon successful completion of the ADASUVE post-approval studies in the U.S. and achieving net sales targets. In addition, Teva will make tiered, royalty payments based on net commercial sales of ADASUVE. Teva will also make available up to $25 million to Alexza via a five-year convertible note and agreement to lend, which Alexza may access to support its ADASUVE activities.

  • On July 30, 2013, Alexza announced that the company's commercial partner Grupo Ferrer Internacional, S.A. has initiated sales of ADASUVE® inhalation powder, pre-dispensed (Staccato® Loxapine) in the European Union ("EU"). ADASUVE is now available in Germany. The first sale and shipment of product by Ferrer triggered a $1.25 million milestone payment to Alexza, pursuant to the Company's collaboration agreement with Ferrer.

Recently, I had the opportunity to ask some questions of the senior management team of Alexza Pharmaceuticals including its CEO, Mr. Thomas King. I have the pleasure of sharing my questions and Alexza's answers below:

Alexza Questions & Answers

Mr. King, congratulations on all of the progress Alexza has made towards its goals of commercializing ADASUVE and continuing to develop the Staccato system pipeline of other new drug candidates. Thank you for taking the time to answer a few questions regarding the following topics:

  1. Alexza's financial results for Q2 2013

  2. ADASUVE commercialization partnership with Grupo Ferrer

  3. ADASUVE commercialization partnership with Teva

  4. ADASUVE commercialization strategy for the rest of the world (ROW)

  5. Future development plans for the Staccato delivery system

Q1. Included in the earnings numbers for the three months ended June 30, 2013, the largest expense item is a non-operating loss of $31.5 million. This loss is related to Alexza's update of the Symphony Allegro contingent liability fair value model. It is my understanding that this loss is a one-time, non-recurring and non-cash loss. Is that correct?

A1. The Symphony Allegro contingent liability is adjusted quarterly to account for changes in various assumptions underlying the computation, including: sales estimates, royalty rates, clinical success, partnering vs. self-commercialization, and timing of them (which impacts the NPV), etc. Therefore we report any adjustments quarterly to our P&L. The Q2 change was significant due to several factors, with the most impactful being the completion of the Teva Agreement and the resulting change in our assumptions on the probability of a partnership, which is now 100%. We expect to continue to record gains/losses on the contingent liability in future quarters; however we expect the gain/loss to be dramatically lower than the amount recorded in the second quarter of 2013.

Q2. It is my understanding that the reasons that the Symphony Allegro contingent liability had to be increased by $31.5 million were: (1) Alexza is expecting to receive more income in the form of upfront cash payment and milestone payments and royalty payments from the Teva deal than what Alexza had previously estimated prior to signing the Teva deal, and (2) the probability of Alexza receiving future ADASUVE income increased after signing the Teva deal, and (3) the risks associated with not signing a commercialization deal for the U.S. market were greatly reduced after signing the Teva deal, and as a result a lower discount rate in the fair value model is justified. Is that correct?

A2. Under the terms of the Symphony Allegro acquisition in 2009, Alexza is to make payments for any royalties/milestones received for Staccato loxapine (ADASUVE) and Staccato alprazolam (AZ-002) to the former Symphony Allegro stockholders. However, no payments were to be made if Alexza were to self-commercialize these products. Prior to signing the Teva agreement, there was a probability that Alexza would self-commercialize ADASUVE in the U.S., resulting in lower probability weighted average payments under the Symphony Allegro agreement. Upon signing of the Teva agreement, the probability of licensing the product in the US increased to 100%, resulting in a large adjustment to the contingent liability. We also adjusted our discounted cash flow model to reflect the terms of the Teva agreement and the lower discount rate due to Alexza's reduced financing risk.

Q3. According to Alexza, there are 9 countries that Grupo Ferrer will pay Alexza a milestone payment for first country ADASUVE sales. Five of those countries are: Germany, France, Italy, Spain and the United Kingdom. What are the other 4 countries?

A3. We have not disclosed the identities of the other countries for which we would receive milestone payments upon first commercial sales. In the second quarter, we reported that we have received a $1.25mm milestone payment for the first country sale of ADASUVE in Germany.

Q4. When the Grupo Ferrer commercial partnership agreement for ADASUVE was amended in 2012, Grupo Ferrer indicated that they are going to move forward with submitting ADASUVE product registrations in Brazil and Mexico. Has ADASUVE been registered in Brazil and Mexico? If not, when do you expect these registrations to be completed, and when do you expect ADASUVE to be launched in Brazil and Mexico?

A4. Ferrer has not notified us of product registrations being received from Brazil or Mexico. All announcements regarding the timing of specific country registrations and product launches in the Ferrer territories will be made by Ferrer. We will provide timely updates for all material information related to ADASUVE including product registration and country product launches.

Q5. Alexza indicated that it will start producing launch quantities of ADASUVE for Teva in Q3 and Q4 of this year, for the U.S. sales launch of ADASUVE. Does that mean that Alexza will record some ADASUVE sales revenue for ADASUVE sold to Teva at the transfer price, during Q3 and Q4 of this year?

A5. Alexza does anticipate recording ADASUVE product revenues related to sales to Teva in 2013. As you are aware, under US GAAP, the timing of recognizing product revenues may or may not correspond to the timing of the product shipment. As we stated in our 10Q, we do not expect royalty revenues from Teva prior to the first quarter of 2014.

Q6. Since Teva is Alexza's ADASUVE commercial partner in the U.S., has Teva also expressed an interest in partnering with Alexza in Canada?

A6. Alexza does not comment on the status of any specific negotiations or discussions regarding additional territories or products.

Q7. I noticed that Teva is already producing generic versions of most of the drug compounds that Alexza has had in its Staccato drug delivery pipeline, including: alprazolam, fentanyl, and zaleplon. Has Teva expressed an interest in partnering with Alexza on any of these other Staccato based pipeline drugs?

A7. Alexza does not comment on the status of any specific negotiations or discussions regarding additional territories or products.

Q8. The Staccato platform appears to be a very good fit for Teva's New Therapeutic Entities ("NTE") strategy because the Staccato system has been tested to work with about 200 known drug compounds. Were the broad applicability and versatility of the Staccato platform two of the factors that attracted Teva as a commercial partner?

A8. We agree that the Staccato platform has broad applicability and versatility. The transaction with Teva was specific for the U.S. commercial rights for ADASUVE. We do agree that ADASUVE is an NTE, by the terms that Teva uses to outline this strategy, and are pleased to be part of Teva's evolving strategy with this novel and unique pharmaceutical product.

Q9. I read that Teva recently announced (June 17, 2013) that it acquired a company called MicroDose Therapeutx for up to $165 million. MicroDose has a proprietary inhalation technology that includes a multi-dose dry powder nebulizer device, and the ability to deliver doses to patients without preparations in less than 30 seconds. How would you compare and contrast the Staccato platform compared to the MicroDose technology, and what advantages does StaccatoO offer?

A9. We have not spent time reviewing this technology and as such, do not have a comparison (pros/cons) of this inhalation technology.

Q10. Is Alexza involved in any active discussions with potential commercial partners for ADASUVE in non-U.S. and non-Grupo Ferrer territories, including: Canada, Japan, China, India, the Middle East, and North Africa?

A10. Alexza believes that there are more than 40 million possible patients for ADASUVE in countries and/or territories that are not currently partnered. A key business development initiative at Alexza is to find partners for ADASUVE based on the advantages of having two approvals (EU and US) and an operating commercial manufacturing facility for the product. Alexza does not comment on the specific status of any discussions; however we continue to explore various commercialization options in the countries outside of the US and the Ferrer territories.

Q11. There has been a lot of talk recently about using an inhalation delivery method to deliver chemotherapy drugs needed to treat lung cancer patients, and to deliver insulin for patients with Type II diabetes. Is the Staccato platform a viable delivery platform for these kinds of drugs?

A11. Our Staccato technology has shown technical feasibility with small molecule drugs, making insulin a poor candidate for our platform. Staccato has been broadly studied for products where systemic delivery is important, and we have not looked at compounds where the target would be to keep the drug in the lung for local delivery.

Q12. When will the Staccato platform include a multi-dose drug delivery system?

A12. During the second half of 2013, we will perform an in-depth review of potential product candidates to consider for our pipeline, which may include candidates based on a multi-dose drug delivery system.

We have completed one Phase 1 clinical study, which has been published in the peer-reviewed literature, where we administered fentanyl in a Staccato multi-dose device. Our current partnership with Cypress BioScience / Royalty Pharma is for nicotine in a Staccato multi-dose device.

That was my last question to, and the last answer received from Alexza.

Conclusions

Overall, Alexza is excited and optimistic about the prospects and future of ADASUVE and the Staccato system. However, this excitement and optimism is not reflected in Alexza's current stock price. On December 20, 2012, the day before the FDA approved ADASUVE in the U.S., Alexza's stock price closed at $6.22 per share. This was also before:

  1. ADASUVE was approved by the EMA on February 21, 2013,
  2. Alexza and Teva signed a U.S. commercial partnership deal worth up to $260 million on May 8, 2013,
  3. ADASUVE was launched in Germany by Grupo Ferrer on July 30, 2013.

On August 20, 2013, Alexza's stock closed at $4.29 per share. This is a decrease of more than 30% in value since December 20, 2012. This is significantly less than the valuation I derived for Alexza's shares after its deal with Teva. I believe that Alexza has executed its overall business plan very well since the 4th quarter of 2012. I believe that Alexza is well on its way to globalizing the sales opportunities for ADASUVE.

I also believe that with the FDA and EMA approvals of ADASUVE, the Staccato system has been validated, and it has added credibility. The Staccato system has been tested to work with about 200 known drug compounds, and it is a very good fit for Teva's NTE strategy.

During the 2nd half of 2013, and all of 2014, Alexza should continue its positive accomplishments, including:

  • Continuing to launch ADASUVE in the 28 EU Member States that comprised the EU, including the additional 8 countries that Alexza will be paid a first country sales milestone payment by Grupo Ferrer.
  • Manufacturing and shipping ADASUVE to Grupo Ferrer to fill quantities needed for launch in each country, and to supply on-going demand. Alexza will continue to record revenue from Grupo Ferrer at the transfer price during 2013 and thereafter.
  • Manufacturing and shipping ADASUVE to Teva to fill quantities needed for launch in the U.S., and to supply on-going demand. Alexza will record some ADASUVE revenue from Teva during 2013, and thereafter, at the transfer price. ADASUVE is expected to be launched in the U.S. by Teva in early 2014.
  • Continuing to look for additional commercial partnership opportunities to add more non-U.S. and non-Grupo Ferrer territories for ADASUVE, including: Canada, India, Japan, China, the Middle East, and North Africa.
  • Re-evaluating and re-activating its Staccato system pipeline, starting with AZ-002, Staccato alprazolam.
  • Continuing to work with its partners, Grupo Ferrer and Teva, to complete all required FDA and EMA post-approval studies, and possibly expand its approved ADASUVE labels to include new indications, and/or patient populations, or modify the existing REMS requirements.

My primary conclusion is that Alexza's share price is currently significantly undervalued, and it represents a good value for patient, long-term investors, who have a time-horizon of at least 6 to 12 months.

Disclosure: I am long ALXA. 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.