Editors' Note: This article covers a stock trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.
Teva Pharmaceuticals Industries Limited (TEVA) is preparing to launch ADASUVE (Loxapine Inhalation Powder 10 mg) in the U.S. any day now. Most analysts had projected that ADASUVE would be priced at $70 to $75 per dose in the U.S. However, recent evidence suggests that Teva will price ADASUVE at $145 per dose instead of $70 to $75 per dose. ADASUVE at $145 per dose is about 2 times more than what most analysts were projecting. I will provide the evidence for ADASUVE being priced at $145 per dose in this article.
Teva entered into an exclusive license and supply agreement for ADASUVE with Alexza Pharmaceuticals, Inc (ALXA) on May 8, 2013 for the acute treatment of agitation associated with schizophrenia or bipolar I disorder in adults in the U.S.
Teva will pay Alexza up to $260 million, plus ongoing tiered royalty payments, for the commercial sales rights to ADASUVE in the U.S. Teva has already paid Alexza a $40 million upfront cash payment, and Alexza 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 to Alexza based on net commercial sales of ADASUVE. Teva also will 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.
Teva is Successful in Getting Medicare & Medicaid Coverage for ADASUVE
Teva has quietly been putting everything in place during the past several months readying for the launch of ADASUVE in the U.S. Recently, Teva was successful in getting ADASUVE covered nationwide by Medicare and Medicaid in all 50 states and all U.S. territories. According to the Centers for Medicare & Medicaid Services ("CMS"), Medicare insured about 52.3 million people in the U.S. during 2013 (page 12). CMS also reported that Medicaid insured about 72.8 million people (page 21). Combined, Medicare and Medicaid insured a total of 125.1 million people in the U.S. during 2013.
CMS recently assigned a new Healthcare Common Procedure Coding System (HCPSC) code for ADASUVE, and listed ADASUVE (Loxapine, inhalation powder, 10 mg) as a new covered drug. The new HCPSC code for ADASUVE is C9497. You can see this on page 190 of the December 10, 2013 edition of the Federal Register
ADASUVE has a Status Indicator ("SI") code of "G," which means that it is a Pass-Through drug for Medicare and Medicaid and it is paid under the Hospital Outpatient Prospective Payment System (OPPS). The formula for reimbursement or payment for Pass-Through drugs is:
Average Sales Price ("ASP") + 6% = Payment Rate
According to CMS, the OPPS Payment Rate for ADASUVE is $153.70. You can see this on the Table below:
This means that a hospital, pharmacy or any other healthcare facility in the U.S., that uses ADASUVE to treat a patient who is suffering with acute agitation, and the medical bill is paid by Medicare or Medicaid, the amount that will be paid or reimbursed by Medicare or Medicaid for ADASUVE is $153.70 per dose (per inhaler).
The payment rate of $153.70 includes the actual sales price of ADASUVE plus an additional 6% to help the healthcare facility cover its overhead expenses. You can solve for the ADASUVE average sales price ("ASP") by dividing the payment or reimbursement rate of $153.70 by 106 percent or by 1.06. The formula would be:
$153.70 / 1.06 = ASP (Average Sales Price)
$145 = ASP (Average Sales Price)
This indicates that Teva is pricing ADASUVE at $145 per dose for private payers.
Some states have already updated their Medicare and Medicaid payment rates for 2014 to reflect the payment rate for ADASUVE. Here is a look at the payment rates for the Oklahoma Hospital Association ("OHA"). You can see ADASUVE (Code C9497) and its payment rate of $153.70 on page 125 of this report:
You can also see the new ADASUVE payment rate on this report, which shows new covered drugs for the state of Montana, and it shows the new ADASUVE payment rate for Medicaid in 2014. You can see the ADASUVE (Code C9497) payment rate of $153.70 on page 88 of this report.
(click to enlarge)
There are several other hospitals, pharmacies, as well as other healthcare organizations in other states throughout the U.S., which are also showing the Medicare and Medicaid payment rate of $153.70 for ADASUVE of $153.70. Here is a link to a Coastal Carolinas Health Alliance (CCHA) report, which shows the payment rate for ADASUVE (page 21, Code C9497). CCHA is an alliance of member hospitals in North Carolina.
Additional Advantages for ADASUVE Under Obamacare
Effective January 1, 2014, the Affordable Care Act ("ACA", aka "Obamacare"), provided affordable health insurance coverage for millions of Americans through federal and state-based exchanges. In addition, the ACA provides an opportunity for all 50 states, and the District of Columbia (D.C.) to expand Medicaid coverage for millions of low-income Americans. Thus far, 26 states and D.C. have decided to participate in the Medicaid expansion part of the ACA. The Congressional Budget Office ("CBO") is estimating that an additional 9.0 million Americans will sign up for expanded Medicaid coverage in 2014 as a result of the ACA. Adding the additional 9.0 million Americans covered because of Medicaid expansion to the 125.1 million people already covered by Medicare and Medicaid, there will be a total of 134.1 million Americans covered in 2014. Having significantly more Americans covered by Medicare, Medicaid, and other private health insurance plans through the Federal exchange or their own state-operated exchange, will be an additional positive for Teva, Alexza and ADASUVE.
In addition to providing affordable health insurance coverage for an estimated 32.0 million uninsured Americans, the ACA also includes a number of critical protections for consumers or beneficiaries, as well as provisions to improve the quality of care while bending the curve of healthcare costs. The ACA will provide one of the largest expansions of mental health and substance use disorder coverage in a generation. Beginning in 2014 under the law, all new small group and individual market plans will be required to cover ten Essential Health Benefit categories, including mental health and substance use disorder services, and will be required to cover them at parity with medical and surgical benefits.
According to the U.S. Department of Health & Human Services ("HHS"), The ACA and its implementing regulations, building on the Mental Health Parity and Addiction Equity Act, will expand coverage of mental health and substance use disorder benefits and federal parity protections in three distinct ways:
(1) by including mental health and substance use disorder benefits in the Essential Health Benefits
(2) by applying federal parity protections to mental health and substance use disorder benefits in the individual and small group markets
(3) by providing more Americans with access to quality healthcare that includes coverage for mental health and substance use disorder services.
In my opinion, all of these ACA provisions should help to increase the commercial sales potential of ADASUVE in the U.S. to significantly more annual units than what is currently anticipated by most analysts.
Why Did Teva Price ADASUVE at $145 Per Dose?
There are several factors that a pharmaceutical company considers when determining the price of a new drug. Some of those factors are:
- The "value added" factor because the new drug provides advantages compared to other currently available treatment options. These advantages could be: better efficacy, safety, speed of onset, lack of invasiveness, etc.
- The total cumulative development costs incurred over the years in connection with discovering, designing, testing and producing the new drug.
- The remaining length of the patent's life for each patent that protects the new drug. This will determine how many years or months the company will have to recoup the development costs incurred for the new drug.
- The length of any period of exclusivity granted by the FDA (or any other regulatory body) that protects the new drug from generic competition. This will determine how many years or months the company will have to recoup the development costs incurred for the new drug.
- The costs associated with any required post-approval clinical trials or studies.
- The costs associated with developing, managing, administering and monitoring an on-going Risk Evaluation & Mitigation Strategies ("REMS") program required by the FDA.
- The costs associated with purchasing the licensing rights to the new drug. These costs include: upfront cash payments, on-going tiered royalty payments, and periodic milestone payments.
- The average monthly or annual costs a patient would incur if they were treated with the new drug.
ADASUVE represents a new paradigm shift, and a new standard of care in the available treatment options for patients who have been diagnosed with schizophrenia or bipolar I disorder, and are suffering with acute agitation. ADASUVE is based on Alexza's proprietary and patented technology, the Staccato® system. The Staccato system vaporizes an excipient-free drug to form a condensation aerosol that is inhaled and rapidly achieves systemic blood circulation via deep lung absorption. The Staccato system consistently creates aerosol particles averaging one to three and one-half microns in size, which is the most appropriate size for deep lung inhalation and absorption into the bloodstream.
ADASUVE's advantages compared to the other currently available treatment options (oral tablets or intramuscular ("IM") injections) for acute agitation include:
- Oral tablets or capsules are convenient and cost effective, but they generally do not provide rapid onset of action. Oral tablets may require at least one to four hours to achieve peak plasma levels. Also, some drugs, if administered as a tablet or capsule, do not achieve adequate or consistent bioavailability due to the degradation of the drug by the stomach or liver or inability to be absorbed into the bloodstream.
- Intramuscular (IM or IV) injections provide a more rapid onset of action than oral tablets. However, with a few exceptions, injections generally are administered by trained medical personnel in a medical care setting. All forms of injections are invasive, can be painful to some patients and are often expensive. In addition, many drugs are not water soluble and can be difficult to formulate in an injectable form.
ADASUVE is breath actuated, and a patient simply inhales to administer the drug dose (Loxapine inhalation powder, 10 mg). The advantages of ADASUVE compared to oral tablets and IM injections can be summed up as follows:
1. Rapid Onset. The aerosol produced with ADASUVE is designed to be rapidly absorbed through the deep lung with a speed of therapeutic onset comparable to an IV injection, generally achieving peak plasma levels of drug in two to five minutes.
2. Ease of Use. The ADASUVE inhaler is breath actuated, and a patient simply inhales to administer the drug dose. Unlike injections, ADASUVE is noninvasive and may not require caregiver assistance. The aerosol produced with the Staccato system is relatively insensitive to patient inhalation rates. Unlike many other inhalation technologies, the patient does not need to learn a special breathing pattern. In addition, the Staccato device is small and easily portable.
3. Consistent Particle Size and Dose. The Staccato system uses rapid heating of the drug film to create consistent and appropriate particle sizes for deep lung inhalation and absorption into the bloodstream. The Staccato system also produces a consistent high emitted dose, regardless of the patient's breathing pattern.
You can see a summary of some of the advantages of ADASUVE compared to oral tablets and IM injections on the Alexza slide below:
ADASUVE offers significant advantages as a treatment option for patients suffering with acute agitation compared to oral tablets and IM injections. These efficacy, speed of onset, and lack of invasiveness advantages do justify premium pricing of ADASUVE compared to the other available treatment options.
Alexza conducted some initial market research back in 2008 (almost 6 years ago) by surveying and interviewing Key Opinion Leaders ("KOLs"), including: doctors, psychiatrists, nurses, and healthcare insurers. Alexza wanted to determine if these KOLs would likely use or prescribe ADASUVE to treat patients suffering with acute agitation, and to determine what price point these KOLs would consider ADASUVE a good value proposition. Based upon Alexza's research back in 2008, Alexza determined that a price of $75 per dose for ADASUVE was a good price point for ADASUVE.
During 2009 and 2010, Alexza performed some follow-on market analysis for ADASUVE and determined that the upside pricing potential for ADASUVE was up to about $125 per dose (per inhaler).
Alexza determined a reasonable price point for ADASUVE during 2008 and 2010 before any of these events occurred:
1. Alexza received a Complete Response Letter ("CRL") from the FDA in connection with the ADASUVE New Drug Application ("NDA") on October 8, 2010, and ADASUVE was not approved by the FDA.
2. Alexza received a 2nd CRL from the FDA in connection with the ADASUVE New Drug Application ("NDA") on May 3, 2012, and ADASUVE was not approved by the FDA.
3. ADASUVE was approved by the FDA on December 21, 2012. As part of this approval, the FDA is requiring that Alexza completes a 10,000 patient post-approval observational study for ADASUVE.
4. Alexza signed a commercial partnership agreement with Teva on May 8, 2013 worth up to $260 million. Teva will be responsible for all U.S. commercial and clinical activities for ADASUVE, including U.S. post-approval clinical studies.
Each of these 4 events did impact how long of an opportunity Alexza would have to monetize ADASUVE in the U.S., and what the total development and licensing costs for ADASUVE would be. Teva will need to recoup the ADASUVE licensing fee of up to $260 million, and this fee will have to be considered when pricing ADASUVE.
When Alexza first determined that $75 per dose was a reasonable price for ADASUVE in 2008 that was almost 6 years ago. Even the follow-on ADASUVE pricing analysis in 2009 and 2010, which showed an ADASUVE upside price of $125, was 4 to 5 years ago.
The $75 per dose also did not reflect the regulatory delays in getting ADASUVE approved in the U.S., and as a result, a shorter remaining patent life for some of the ADASUVE patents.
The $75 per dose also did not reflect or assume the following: the FDA would require an ADASUVE REMS program, the FDA would require a post-approval (10,000 patient) observational study, and Teva would pay up to $260 million to purchase the licensing rights for ADASUVE in the U.S.
After Alexza and Teva signed the ADASUVE licensing agreement for the U.S., Alexza turned over all of its ADASUVE pricing analysis from 2008, 2009 and 2010 to Teva.
Teva took Alexza's analysis and updated it with all of the additional pricing factors listed above that occurred after 2008, 2009 and 2010. In addition, Teva contacted and surveyed KOLs, including: doctors, psychiatrists, nurses, health insurers, etc., to conduct its own updated pricing analysis for ADASUVE. At the end of this process, Teva has apparently determined that a price of $145 per dose is a reasonable price for ADASUVE.
What Does This Mean For Alexza?
In my opinion, a price per dose of $145 for ADASUVE instead of $75 per dose is very good news for Alexza. Alexza had previously guided that the U.S. annual peak sales opportunity for ADASUVE was about $225 million. However, that was based on an ADASUVE price per dose of $75. You can see the ADASUVE annual peak U.S. sales opportunity, assuming a $75 per dose price, on the Alexza slide below.
With an ADASUVE price per dose of $145 instead of $75 ( a 93.33% increase in the ADASUVE price per dose), the peak sales opportunity for ADASUVE in the U.S. would proportionately increase to over $400 million per year instead of $225 million. A summary of the advantages of an ADASUVE sales price of $145 per dose include the following:
1. ADASUVE's annual peak sales potential in the U.S. would increase from $225 million per year to over $400 million per year. This assumes that ADASUVE will obtain the same level of market share and market penetration that Alexza and most analysts had estimated before.
2. The price targets generated by analysts who cover Alexza are generally based on an ADASUVE price per dose of about $75. This includes the Piper Jaffray price target of $10 per share. Piper Jaffray conducted outreach to ER physicians, psychiatrists, and other key opinion leaders' points and stated that "there were several factors that enhance our conviction on both the near- and longer-term market potential for Adasuve versus our previous projections." If Piper Jaffray were to update their Alexza price target, and use an ADASUVE price per dose of $145 instead of $75, and assume the same level of market penetration and market share, Piper Jaffray's new Alexza price target could be closer to $20 per share instead of $10 per share.
3. Roth Capital also has an Alexza price target of $10 per share. If Roth Capital were to update their Alexza price target, and use an ADASUVE price per dose of $145 instead of $75, and assume the same level of market penetration and market share, Roth Capital's new Alexza price target could be closer to $20 per share instead of $10 per share.
4. My valuation of Alexza was $16.28 per share. If I were to update my Alexza price target valuation, and use an ADASUVE price per dose of $145 instead of $75, and assume the same level of market penetration and market share, my new Alexza price target valuation would be closer to $30 per share instead of $16 per share.
5. The biggest difference between my valuation of Alexza at $16 per share, and the other analysts' price target valuations at $10 per share, was I assumed that Alexza would earn most, if not all, of the $195 million in Teva sales based and clinical based milestone payments.
The likelihood or probability of Alexza earning most or all of the $195 million in sales milestone payments from Teva will increase because of increasing the ADASUVE sale price per dose to $145 from $75 per dose. Teva would not have to sell as many ADASUVE inhaler units in order for the sales based milestone payments to be triggered and earned by Alexza.
Teva Has Confidence in its Ability to Market & Sell ADASUVE
ADASUVE will be marketed and sold in the U.S. by the Teva Select Brands, a division of Teva Pharmaceuticals USA. Teva USA has already added ADASUVE to its website on its Specialty Medicine page. Here is the link: Teva USA Specialty Medicines - ADASUVE.
Teva has decades of experience marketing and selling drugs to treat patients in the U.S. who have been diagnosed with schizophrenia and bipolar I disorder. Teva will be targeting the same 800 to 1,000 healthcare facilities (hospitals, psychiatric hospitals, emergency departments, mental health clinics, etc.) in the U.S. that is also targets for its other neuropsychiatry drugs. These other neuropsychiatry drugs that Teva markets and sells include: Clozapine, Risperidone, Nuvigil and Provigil. Teva's CNS commercial sales team in the U.S. has over 500 sales reps nationwide. You can see this data on the Teva slide below:
Teva has existing relationships with most, if not all, of the doctors, psychiatrists, nurses, emergency room doctors, emergency room nurses, and other healthcare providers who will be treating patients who are suffering with acute agitation.
One of the primary cornerstones of Teva's strategic plan for future growth in 2014 and beyond is the development and/or licensing of a New Therapeutic Entity ("NTE"). An NTE is defined as: A process to generate new specialty products that address an unmet patient need, are based on a known molecule and are formulated, delivered, or used in a novel way.
ADASUVE is an NTE because it is based on a known molecule (Loxapine) that is delivered in a new or novel way (deep lung inhalation for systemic delivery via the Staccato system). ADASUVE will be Teva's first and only NTE drug that will be launched in 2014. ADASUVE is currently Teva's only FDA approved NTE drug.
Teva has stated that they believe that each of their new NTE drugs will average about $250 million in annual sales. Some new NTE drugs will exceed $500 million in annual sales. You can see this on the Teva slide below:
(click to enlarge)
Teva also stated in their 2014 Financial Outlook that their NTE development program will be a major business driver during 2014 and beyond, and Teva listed ADASUVE as one of its high-potential growth opportunities in its specialty business.
Teva plans to develop at least 10 new NTE drugs each year. Teva is putting together a sustainable platform to help meet this goal. You can see this on the Teva slide below:
With its recent acquisitions of MicroDose Therapeutx and NuPathe, Inc. (PATH), Teva has shown that it is aggressively building and acquiring new drug delivery platform technology (inhalation and transdermal delivery) to help Teva meet its goal of developing at least 10 new NTE drugs each year.
Alexza's Staccato system platform has been tested and proven to work with over 200 known drug compounds. By comparison, MicroDose Therapeutx DPI inhaler has only been proven to work with about 40 known drug compounds. The Staccato system platform has much broader applicability.
The Staccato system platform is an ideal platform for creating a sustainable platform that is capable of developing at least 10 NTE drugs each year. In fact, all of the Staccato system based drugs that were in Alexza's old pipeline and in its new pipeline thus far, are all known compounds that are already being produced by Teva in generic or specialty form, including: Staccato Alprazolam (Xanax), Staccato Fentanyl, and Staccato Zaleplon.
Alexza was already significantly undervalued and over-sold when analysts were using an ADASUVE price per dose of $75 to derive their price target of about $10 per share. Using an ADASUVE price per dose of $145 makes Alexza an even more under-valued and attractive long-term investment option for investors who are patient and have a time horizon of 6 months or more.
I believe that my updated Alexza's valuation and price target using an ADASUVE price per dose of $145 in the U.S. will value Alexza between $25 per share to $30 per share. I will update my Alexza valuation after the company releases its 2013 year-end results.
I also believe that the annual peak sales potential for ADASUVE in the U.S. will be closer to $400 million instead of $225 million if ADASUVE does capture the market share of the acute agitation market that most analysts are projecting.
In addition, my valuation for Alexza of $16 per share, and the price target of the other analysts of $10 per share, are based on the currently FDA and EMA approved labels for ADASUVE in the U.S. and the E.U., and ADASUVE sales only in the U.S. and the Grupo Ferrer territory.
The current Alexza valuations and price targets do not include any value for the following factors:
1. A revised ADASUVE label and/or REMS modification by the FDA that will allow for in-home use of ADASUVE in the U.S. This is a possibility if the post-approval clinical trial efficacy and safety data supports this change.
2. A revised ADASUVE label by the FDA that will allow for adolescents to be treated with ADASUVE in the U.S. This is a possibility if the post-approval clinical trial efficacy and safety data supports this change.
3. ADASUVE sales in other territories outside of the U.S. and the Grupo Ferrer territory. Alexza has not sold the licensing rights for ADASUVE in territories such as: Australia, Canada, China, Japan, Korea, India, the Middle East, and North Africa. If and when Alexza does sell the licensing rights to ADASUVE in any of these other territories, that will mean more upfront cash payments, more milestone payments, more tiered royalty payments, and a higher valuation for Alexza.
4. Added value for Alexza's other Staccato system pipeline products. The current valuations for Alexza are primarily focused on the value of ADASUVE, and does not include any or much value for other pipeline products, such as: Staccato Alprazolam and Staccato Nicotine.
5. Added value for the Staccato system platform, and its proprietary nature and all of it hundreds of patents worldwide.
6. A buyout or control premium if Alexza were to be acquired by Teva. My valuation, and the other analysts' valuations, assumes that Alexza is a stand-alone business.
Alexza closed at only $4.90 today, therefore, in my opinion there is significant upside potential in Alexza shares, and Alexza is currently trading at a significant discount relative to its "true" value.