A New Deal for Alexza Could Present Opportunity for Investors

| About: Alexza Pharmaceuticals, (ALXA)

Following Alexza's (NASDAQ:ALXA) meeting with the U.S. FDA relating to the complete response letter (CRL) in October 2010 for AZ-004 (Staccato loxapine), management has guided to a refiling of the NDA in July 2011. In a research note to clients Tuesday morning we outlined the four key issues raised by the FDA in the CRL and how we believe management has taken the necessary steps to address these issues prior to re-filing the application.

The next biggest catalyst for Alexza is now a new commercialization partnership for the drug. Alexza has guided that it would like to have a new deal in place for AZ-004 around the time of the NDA filing. We note that the company is also preparing an MAA filing for the European market. This is expected to take place in the Q3-2011, shortly after the NDA filing n July 2011. Management does not believe any substantial clinical work will be necessary for EMEA approval.

The opportunity to re-partner AZ-004 is intriguing. The company noted that previously firms were not interested in AZ-004 because they wanted more than just the North American rights previously licensed to Biovail Labs (BVF). Management has noted the beginning of discussions with new parties on AZ-004 that are now seeking global alliances. This opens the door to a whole new group of potential bidders that did not exist in mid-2010. New interested parties can also take advantage of all the pre-commercialization work that Biovail conducted prior to the CRL in October 2010. This includes a detailed market breakdown and pricing analysis, which management estimates cost in the millions of dollars, all of which is in Alexza's possession. This is excellent marketing material that Alexza can use to attract a new potential partner.

We remind investors that the previous, North American-only deal with Biovail included a $40 million upfront payment. We expect that a new deal for the global rights to AZ-004 will include a similar upfront payment, with potential backend milestones to include approvals in territories outside the U.S. We are optimistic that something gets done around the NDA filing. We would not be surprised to see a deal prior to the actual filing in July 2011 so that Alexza's new partner can be involved in the re-submission.

Alexza held $53 million in cash and investments at the end of the third quarter 2010. We estimate burn in the fourth quarter was approximately $8 million. Guidance is that the company has enough cash to fund operations into the second half of 2011. This tells us management needs to get something done prior to the end of the third quarter 2011. Given the dilutive offering in August 2010, we think management's clear impetus is to secure a partnership prior to the need for additional funds. Our financial model assumes a deal gets done late in the second quarter 2010. In our view, the market is not expecting a deal so soon, and that presents investors with an opportunity to get in ahead of the news.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.