Zogenix - The 3 Main Hurdles For Zohydro

| About: Zogenix, Inc. (ZGNX)

According to the Institute of Medicine of The National Academies, roughly 100 million Americans suffer from chronic pain, many of which require regular analgesic therapy. Opioids are a common therapy for the treatment of moderate to severe pain, with hydrocodone products topping the charts. In 2011, hydrocodone accounted for 137 million prescriptions. With a market this large it goes without saying that even a small market share can produce large profits.

Zogenix (NASDAQ:ZGNX) is looking to capitalize with its newly approved product Zohydro. Zohydro is an extended-release form of hydrocodone that uses a release formulation known as spheroidal oral drug absorption system (SODAS) to produce a pharmacokinetic profile that allows 12-hour dosing. This technology makes Zohydro the only FDA-approved, extended-release hydrocodone product at this time. As a pharmacist with years of experience in a pain clinic, I have unique insight into the potential success of Zohydro. This article will attempt to explain the three main hurdles that will affect Zohydro sales.

The first hurdle Zogenix will have to overcome is gaining traction in the prescriber's office. Gaining confidence of prescribers can take years after a medication hits the market. Due to the upcoming competition, Zohydro can't wait this long. To overcome this, Zogenix will need to invest millions in drug rep visits and brochures/advertisements. Also they will need to coordinate an effective marketing campaign that emphasizes the familiarity of hydrocodone, as most prescribers regularly write for hydrocodone products. If the drug reps can emphasize the familiarity of hydrocodone and leverage the fact that Zohydro doesn't contain acetaminophen (the leading cause of acute liver failure in the U.S.), they will have an easier time convincing prescribers Zohydro is the best therapy.

Price is Zohydro's next hurdle. Although Zohydro has the unique niche of being the only extended-release hydrocodone on the market, most of its potential patients are already on its biggest competition, immediate-release hydrocodone. Immediate-release hydrocodone products such as Vicodin, Lortab, and Norco are all generic with a cash price of $0.15-$0.30 per tablet. Although I haven't seen prices for Zohydro, I would assume the price to be comparable to lower doses of OxyContin ($3-$5 dollars per tablet), meaning a monthly cost of $180-$300. I am discussing cash price as I don't see insurers putting Zohydro on their formulary immediately.

The patients converted to Zohydro will also need a separate prescription of immediate-release opioid for breakthrough pain, adding $20-$40 to their monthly cost. If a generic Norco patient taking one Norco 10 every four hours is converted to Zohydro, their monthly cost would go from $27-$54 per month to anywhere from $200 to $340. This $150-plus per month increase is significant considering Zohydro has no proven benefit over the competition, outside of a few less tablets a day. It is because of the extra cost I feel Zogenix will lose 60%-70% of the patients who leave the physician's office with a prescription for Zohydro.

The final hurdle on the horizon will be Big Pharma. Although Zohydro is the first to reach market, Teva (NYSE:TEVA) and Purdue are in the final stages of producing extended-release hydrocodone products. This spells big trouble for Zohydro, as both of its future competitors will have abuse resistant technology along with big pharma marketing teams. Zogenix has stated they will work on an abuse-resistant formulation, but by the time the new formulation hits the market, it may be too late.

Final Thoughts

Zohydro will benefit from the familiarity physicians have with hydrocodone and will become commonly prescribed shortly after launch. Complications will arise when patients enter the pharmacy and realize the new therapy will cost an extra $150-plus per month. Zogenix will have to rapidly contract with insurers, so the high rate of Zohydro prescriptions leaving the physician's office translates to high script sales. Short term, I estimate 700,000 scripts in the first 12 months. If insurers do sign on with Zohydro, this number will skyrocket.

Once Teva and Purdue enter the market, Zogenix will face its true test. To combat the inevitable monsoon of Big Pharma marketing, Zogenix will have to quickly develop an abuse-resistant formulation then leverage the brand recognition Zohydro gains from being first to market. Once insurers are on board with extended-release hydrocodone, the combination of brand recognition and large patient population will help script count and thus Zogenix's market cap raise drastically over the next few years.

Of course, as with all small-cap pharmaceutical stocks, there are no guarantees. Any bad news, big or small, can lead share prices to plummet. As outlined above, Zogenix will need to overcome many hurdles to live up to shareholder expectations, any stumble along the way will lead to a drop in share prices.

The most worrisome of the upcoming hurdles, in my eyes, is the development of an abuse-deterrent formulation. This process may take years, which leaves time for Teva and Purdue to get to market. If Teva and Purdue enter the arena without an abuse0resistant Zohydro to compete against, prescribers will rapidly convert their patients to the abuse-deterring products. At this point, the damage will be irreparable as Zohydro would likely never recover the patients lost to the competition, thus drastically reducing ZGNX's market cap. Because of this, I recently took a long -- but cautious -- position in ZGNX.

Disclosure: I am long ZGNX. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.