Several Scenarios Ahead of the FDA's Imminent Decision on Alexza

| About: Alexza Pharmaceuticals, (ALXA)

By Patrick Crutcher

Biotech investors should be ready for a big week. With multiple FDA decisions on the line, there should be ample trading and investing opportunities out there. Let's focus on one of these events in particular.

With a PDUFA date of October 11th (Monday), investors expect to hear news from the FDA regarding Alexza Therapeutics Inc (NASDAQ: ALXA) NDA for loxapine, which utilizes their unique Staccato delivery technology. Approval would certainly validate this approach and reward ALXA investors. If approved, ALXA will receive a $15M milestone payment, with an additional $25M if approved in the outpatient setting and $25M at first product shipment. (Note: Approval news could potentially come on Tuesday, given Monday is a federal holiday.)

We see the sole question mark for ALXA to be respiratory safety, considering deep lung delivery of pharmaceutical agents can induce lung inflammation or lung tissue changes. With that said, Loxapine is a small-molecule drug without any cancerogenic or abusive properties. ALXA’s Phase 3 studies confirmed Staccato loxapine was safe and effective, including no serious adverse events. There is a chance the FDA will require a long term lung safety study; however, we believe this to be unlikely given the lack of an advisory panel and the nature of the drug's use.

Additionally, given this is an 505(b)(2) submission, the regulatory risk is significantly lower. Loxapine has been approved for 30+ years and ALXA's safety studies showed no serious pulmonary effects.

Management has made it clear they have made every effort to seek the FDA’s opinion on aspects of the AZ-004 program. In the 2Q conference call, CEO Tom King talked extensively about their positive interactions with the FDA. At the JMP Securities Conference on Sept. 27, CFO August Moretti reiterated this sentiment.

Loxapine is not a drug of abuse and it is a very safe drug. There is no respiratory suppression associated with the drug. There is not a particular safety issue in the outpatient setting....

The FDA has watched the development of the AZ-004 program. We probably had a total of 15 meetings with the FDA on various clinical programs we have brought forward. They've looked at all the development work, they've looked at all the toxicology work. There's no particular concern that has been raised about the issue of the drug being available for systemic delivery.

Our technology delivers pure API, and so the lung only sees active pharmaceutical ingredient. It doesn't see any formulation material. Everything the lung sees comes across lung wall and is available in the systemic circulation. So there hasn't been a concern about whether there is anything left in the lung, or the distribution of the drug.

We also believe that the founder and management's previous track record of success with the FDA is something that should not be overlooked. Dr. Alejandro Zaffaroni, founder of ALXA, has an impressive history of drug approvals and successful acquisitions via big pharma. Additionally, CEO Tom King has a history of success in dealings with the FDA, including approval of Actiq while CEO of Anesta, which was acquired by Cephalon (NASDAQ:CEPH).

With most FDA approvals, an investor has to evaluate a company’s risk-reward profile. There are several scenarios for the price following an FDA decision that an investor should consider. If approved without restrictions, ALXA could easily spike 100-150% ($6-6.50), given the milestone payments ($40M) and short interest; restrictions on the labeling would dampen any spike. If it is not approved, $1.50-2 might be fair value for ALXA, depending on what the FDA says and their current balance sheet. Recently, RBC assigned a 65% probability of approval with $5 as a target price on approval and sees downside risk to $1 if not approved. Investors also should consider the possibility that the FDA delays their opinion on the NDA, given the number of FDA decisions planned for October. We believe we have outlined the investment thesis for ALXA and the case for approval of AZ-004’s(Staccato(R) loxapine).

Disclosure: No position