Risks vs. Benefits in Holding Alexza Through Approval of AZ-004

| About: Alexza Pharmaceuticals, (ALXA)

The important thing in weighing whether to hold a stock through FDA approval or not is to determine what the potential of the stock is after approval. That should be done with every potential approval I have assessed in 2010 as I have been very accurate in my assessment of FDA approvals this year. My toughest scrutiny with a company comes 5-10 days before an approval because I have all of the investment conference notes and clinical data in front of me in order to accurately assess at one time rather than in pieces.

With some companies an FDA approval does not necessarily mean a boon to the stock price. That is why this assessment focuses more on the price after approval. RBC has a conservative estimate of $5 post approval and JPM Securities has a more aggressive estimate of $12 post approval of ALXA upon an approval for AZ-004. No one ever knows what the FDA is going to do even if a company has a panel meeting and potential issues have been addressed and seem apparent. It seems that the AZ-004 data has been clear and transparent in terms of efficacy and safety from the beginning of their Phase II clinical trials with no need for an FDA panel prior to approval. I think the lack of FDA panel is a moot point and can’t be viewed as either a positive or negative by the investor in this specific case. AZ-004 is having their first go around with the FDA today, Oct. 11th. They have not had an approvable letter, complete response letter, or any delay with regards to their product. An investor does not know what the FDA is looking for when they ponder the approval of a drug; that will be the first time a CNS drug is being delivered directly into the lung.

The information that follows focuses on issues that could be key in determining approval and the price of ALXA post approval. The goal is not to do a clinical analysis of trial data but to focus on specific issues that management and analysts have brought forth during conference calls and recent investor conferences.

Initial Indication: rapid treatment of agitation in patients with schizophrenia or bipolar disorder. The two market segments are medically supervised or outpatient. Half of all episodes happen in the medically supervised environment in ER dept, psychiatry ward, physician offices, or long-term facilities. The other half of all episodes occur in the outpatient world where there is not a good way to treat agitation episodes.

Alexza meets the guidelines on how to treat patients with agitation. Published by the American Academy of Emergency Psychiatrists. They ask for 3 things:

1) Speed
2) Predictability
3) Ease of Administration in patients

Strength for Alexza

Oral tablets are easy to use but very slow. IM injections have somewhat of a fast speed of onset but are very invasive. Staccato has solid reliably and a consistent delivery of more than 80% of the drug consistently comes out of the device every time someone inhales it. The company states that everyone could inhale on a different device and they would all get the same amount of drug. There is not another inhalation technology around that offers that consistency and reliability.

Alexza's commercial strategy is broader than initially thought as they have learned more about the outpatient and inpatient markets. We will discuss this later in the article.

Potential Issues:

(1) First time CNS drug will be delivered to the lung.

(2) Skepticism about a drug being delivered to the lung and whether the FDA’s pulmonary division had been involved or any other data points were addressed to make investors feel more comfortable.

(3) Will they require a REMS for the AZ-004?

(4) Theoretical risk of drug and device on the market. How confident can Alexza be without a specific precedent?

(5) All of the work in a medically supervised environment. Physician office, clinic, and the ER. Is that a bad thing for approval?

(6) What does the Biovail (BVF) manufacturing situation look like moving forward?

Addressing The Issues:

(1) In the Pre-NDA Meeting the staff sent a clear signal that there would not be a panel for AZ-004. That was important because panel meetings are usually scheduled when you walk a tightrope between the efficacy and/or safety of a drug. I don’t believe that an FDA panel necessarily provides clarity all the time. With this being the first drug delivered to the lung, this was a perfect opportunity to convene an FDA meeting. Since the safety has been demonstrated there was not a need.

(2) Pulmonary division has been involved. To go through the FDA through the office of the division of combination products so early on, they went to the office of combination products. They made a determination that AZ-004 is a drug and so all applications will be filed as NDAs. They filed electronically with the FDA and the device folks reviewed the CMC portion of the application but at Cedar it was reviewed by the toxicology & pulmonary in the division of psychiatry. Tom Laughren, MD, is the division head.

(3) The staccato is a single-dose device. Not a drug of abuse or not a scheduled drug. They did not submit a REMS. The side-effect profile is very benign on the drug. What they saw in the clinical trials was a little somnolence but not much else.

(4) Throughout the development of the programs they have had about 25 meetings with the FDA in pre-NDA/End of Phase II Meetings pre NDA for various programs. The FDA has seen the development of the technology. This is the 1st time they have been asked to approve the technology but they have seen the development of the technology over years. From a product perspective or device operation perspective, in terms of manufacturing their efficiency rates, they have 3 nominees in terms of actuation of the device.

(5) There could be a restriction of AZ-004 if approved only for the inpatient setting and that should make the FDA feel more comfortable in terms of overall safety. Patients will be medically supervised. Alexza says more than half will be medically supervised. Roughly 55% of the market is inpatient and 45% is outpatient.

If Alexza has to do additional work they will have to do a safety study to show that the drug can be used safely in the outpatient environment either with the help of a caregiver or by themselves. All of the clinical work was medically supervised and call patients will be psychiatrists who treat in the facility as well as psychiatrists in their offices. It's more than a hospital call. 650 hospitals have medical ER rooms, Psych ERs, and Psych Inpatient units. The principle marketing focus is that the core base is in hospitals and then they will expand to non-hospital based psychiatrists.

(6) Planning with Biovail to ship the Staccato in a 5-pack to the hospital pharmacy. The idea is one administration per patient. 1/ 3 of patients would need a 2nd dose in a 24 hr period. If the patient does not have an outpatient approval then the patient would be discharged without the drug. If the patient were admitted to the hospital unit, then the device could be used to treat the patient inpatient. With the outpatient, when someone is discharged from the facility they are given a pack and if they have agitation they can call their providers to take it and avoid the hospital visit. That would incur extra costs. Manufacturing facility inspection was conducted in mid September. Investors do not have a feel for how those meetings went as non-material information has been discussed by the company as a good sign. A PR will be released were there to be material information that affected the PDUFA date. I don’t see that occurring in less than 5 trading days away.

Conclusion: The Staccato AZ-004 could see approval today. There are issues that remain that won't be addressed until today that ALXA may not be aware of and that is why the odds of approval of AZ-004 seem to be betwwwn 65-70% from different analysts. The key for an investor is to determine whether the benefit of approval outweighs the risk in terms of the stock price appreciation post approval. What I can see potentially occurring, is a limited indication on AZ-004 to only the inpatient setting if it does get approved. The reason being is that ALXA has done all of their clinical studies for AZ-004 in the inpatient setting only.

In past conference calls this was the only concern that I heard expressed by Alexza management. If they have a limitation added on approval to only the inpatient setting, then Alexza will not be able to receive their milestone payment from Biovail of between 40-50 million. I think this could hurt them in the future development with lack of funds expected from the milestone payment. There is a possibility, as with many biotechs, that they may need to have another shelf offering as a majority of the money they expect from Biovail would not be delivered.

What does the limited indication do for the stock price if they don’t receive their milestone payment due to the limited indication? This is an issue that was brought forward by my fund investors who had concerns with AZ-004 from a recent investor teleconference. The question for investors is whether holding Alexza through the approval date is worth the risk even with a potentially limited indication. I don't believe that it is worth the risk of holding through approval if the indication is limited, even if approved. Either decision may or may not give investors the price appreciation that they might expect post approval, but at this point that will remain up to the FDA and investors which will be determined today.

Disclosure: No position