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On May 4, 2012, the U.S. FDA is expected to rule on the approval of Alexza Pharmaceuticals' (ALXA) Adasuve (Staccato loxapine) for the treatment of acute agitation in patients with schizophrenia and bipolar disorder. The decision has already been delayed by three months from the original ("PDUFA") action date set by the FDA of February 4, 2012. I view the decision as make-or-break for Alexza, a company that has already significantly reduced its staff in an effort to limit operating burn ahead of the decision.

...Panel Recommends Approval...

Approval remains a wildcard event. But perhaps a good sign that Adasuve might be approved is the backing of the Psychopharmacologic Drugs Advisory Committee, which voted by the narrowest of margins on December 12, 2011, to recommend approval of the drug. The committee voted 9-8-1 that Adasuve should be approved for use as a single dose in 24 hours when used with the FDA proposed Risk Evaluation and Mitigation Strategy ("REMS"). The FDA panel on Adasuve was among one of the strangest I've ever watched. Here's a recap of the voting:

Question: Does the committee conclude that Adasuve (loxapine) inhalation powder has been shown to be effective as a treatment for agitation in patients with schizophrenia or bipolar mania?

The resulting vote was 17-1-0 (yes-no-abstain). This was not surprising given that Alexza ran to well-controlled phase 3 trials with similar enrollment criteria and endpoints used by Eli Lilly when it sought approval of intramuscular (IM) Zyprexa for the same indication. The FDA briefing documents acknowledged the phase 3 trials met statistical significant on the primary endpoint (PEC score) for both the schizophrenia (n=344) and bipolar trials (n=314), with good dose-response. The phase 3 data has been published for peer-review and presented at the 2010 American Psychological Association annual meeting. Here is a link to the poster presentation --> 2010APA/PEC.

I do note that the PDAC stopped short of comparing Adasuve to IM Zyprexa in terms of effectiveness and onset of action. The panel members felt that no direct comparison between the two could be made unless a head-to-head trial was conducted. One of the key attributes of Adasuve is that it has onset of action equal to, if not superior to, intramuscular injections of Zyprexa and Abilify. Alexza or its commercialization partner will be able to market the Adasuve data from the poster above, but will not be able to make any direct comparisons to the IMs on onset.

Question: Does the committee conclude that Adasuve (loxapine) inhalation powder has been shown to be acceptably safe for use as a treatment for agitation in patients with schizophrenia or bipolar mania when used in conjunction with the REMS proposed by the sponsor (Alexza)?

The resulting vote was: 1-17-0. This was not a surprise, as the FDA briefing document was critical of the company's proposed REMS.

Question: Does the committee conclude that Adasuve (loxapine) inhalation powder has been shown to be acceptably safe for use as a treatment for agitation in patients with schizophrenia or bipolar mania when used in conjunction with the REMS proposed by the FDA?

The resulting vote was: 5-12-1. Game over, right? Well, in my best Lee Corso, "Not-so-fast my friend!" This is where the meeting got interesting. The FDA was concerned with the pulmonary safety of the drug, specifically the drop in FEV1 on the second dose of Adasuve in a 24 hour period. The graph below shows the precipitous drop in FEV1 upon the second dose at hour 10. Note the lack of recovery to baseline FEV1 following the second dose. As a result, the FDA and PDAC felt as though dosing Adasuve twice in a 24 hour period was not acceptably safe.

But what about allowing just one dose? The FDA changed the question noted above - on the fly - to add the following clause:

Question: Does the committee conclude that Adasuve (loxapine) inhalation powder would be acceptably safe for use as a single dose in 24 hours as a treatment for agitation in patients with schizophrenia or bipolar mania when used in conjunction with the REMS proposed by FDA?

The resulting vote was: 11-5-2. Again, this is essentially the same question as above, only limiting Adasuve to one dose in a 24 hour period. Alexza wanted to make Adasuve available to patients and physicians as needed if one dose was insufficient to reduce the episode of acute agitation.

It is important to note that the primary efficacy data for both phase 3 trials, in which that panel voted positively on by a majority of 17-1 in the first question above, was after only one dose. The clear majority of patients only require one dose, and the data backs that up. Therefore, I do not see that narrowing the dosing schedule to once per 24 hour period as restrictive or limiting to sales.

And now the key question...

Question: Does the committee conclude that Adasuve (loxapine) inhalation powder should be approved for use as a single dose in 24 hours when used with the FDA recommended REMS, for the treatment for agitation in patients with schizophrenia or bipolar mania.

The resulting vote was: 9-8-1. PDAC has noted to recommend approval to the U.S. FDA. I note that the majority of panel members that voted against approval felt it is necessary for Alexza to conduct a pre-approval observation study. This is something that the panel discussed but did not vote on during the meeting. Alexza has suggested it will conduct the study post-approval. In my opinion, here's the risk, and the reason why the FDA may issue a complete response letter.

The proposed study will seek to enroll 1400 adult male and female patients with diagnosed schizophrenia or bipolar disorder who require treatment for agitation (voluntarily or involuntarily). The study will be a multi-center, prospective observational study conducted in medical or psychiatric emergency settings in the U.S., at approximately 50 sites. Sites will be selected and qualified primarily based on their estimated number of eligible patients. It is anticipated that the enrollment period will be 18 to 24 months and that the duration of patient participation will be up to 24 hours.

...With An Enhanced REMS...

Should the FDA choose to take the advice of the PDAC on the PDUFA date of May 4, 2012, Adasuve will be approved under the REMS outlined by the FDA. The FDA's REMS goes beyond the one proposed by Alexza. Below is a side highlighting Alexza's proposed REMS, and the enhancements made by the U.S. FDA. I note the three month delay in the original PDUFA goal was because updating the REMS per the FDA's guidance was designated as a major amendment.

The FDA suggested taking the REMS outlined by Alexza and has made the following enhancements:

1) The healthcare facility has immediate access to advanced airway management abilities. The healthcare facility would need to ensure that:

a. Short acting beta-agonist bronchodilator is available in metered dose inhaler (MDI) and nebulizer forms to treat early bronchospasm.

b. There is immediate access to advanced airway management abilities (i.e. intubation and ventilators) to treat bronchospasm that is missed and progresses.

2) The healthcare facility will establish or has policies, procedures, and/or order sets in place for appropriately screening patients and monitoring patients post-administration; including orders to:

a. Screen patients by performing a physical exam including assessment for active respiratory disease and by taking a medical history from the patient including current treatment for pulmonary disease (i.e. asthma, COPD).

b. Observe patients after each treatment for a specified amount of time. (The duration of monitoring is unclear, given that the effects on spirometry varied following the first and second dose).

c. Monitor patient's vital signs and physical examination including chest auscultation as well as monitoring for signs and symptoms of respiratory distress every 15 minutes for the first hour and every 30 minutes thereafter.

3) The healthcare facility ensures that prescribers, pharmacists, and staff who will be prescribing / administering the loxapine inhalation powder are trained on the safe use (including proper patient selection, risk of bronchospasm, administration technique, monitoring required, and treatment of bronchospasm.) Training materials would be made available by the sponsor, and the certified healthcare facility would need to keep records of the training.

The FDA also suggests adding a Prescriber Certification, meaning that centers (ER departments or emergency psych wards) would not be allowed to prescribe Adasuve until they were effectively qualified as meeting the above criteria.

The FDA may also seek to include monitoring requirements and audit facilities to make sure that centers were complying fully with the prosed REMS.

Finally, the FDA has proposed a patient registry to enroll patients before receiving Adasuve. This is in an attempt to better characterize the risk in the intended patient population.

...Adasuve Commercial Potential...

With respect to the opportunity in acute agitation, I believe there is meaningful commercial potential for Adasuve. Episodes of acute agitation occur often in the 2.5 million schizophrenia and 6.0 million bipolar disorder patients in the U.S. Management estimates that 90% of these patients will experience an episode of acute agitation during their lifetime. Typically these episodes occur at a frequency of 10 to 12 per year.

Well-treated (on medication) schizophrenia patients often do not experience significant agitation, but the well-treated schizophrenia patient is not the norm. Bipolar patients often go untreated and experience acute agitation during the mania phase of the disease. These episodes are often treated with conventional antipsychotics and benzodiazepines. Currently, the market is split pretty evenly between oral and injectable drugs, with most caregivers starting on oral medications and then moving to IM injections if necessary.

Oral medications are preferred mode of administration. In fact, 55% of all prescriptions for acute agitation are for an oral (rapidly dissolving) tablet. This is important to note because the most common criticism I hear about Adasuve from investors is, "How is an acutely agitated patient going to cooperate and inhale Adasuve?" The answer is pretty simple; they do it the same way the cooperate and take the oral tablet.

Myth No. 1: Acute agitated patients present to the ER in a manic frenzy, throwing chairs and breaking vending machines. Four big orderlies are required to tackle the patient and hold them down while the doctor or nurse rushes in, needle in hand, to save the day.

My response - you watch too much TV. That simply is not the norm. The truth is, over 90% of the time, patient's cooperate with the caregiver to the point where inhaling Adasuve is perfectly feasible.

But oral medications such as alprazolam or diazepam are slow. In fact, roughly 20% of the time following dose of an oral tablet, the patient still requires an IM injection. The outcome is far too unpredictable. Why then do oral medications have 55% market share? Quite simply, no one likes using a needle.

Haloperidol, lorazepam, olanzapine, and ziprasidone are among the most common agents used when the caregiver feels an intramuscular injection is necessary. Unfortunately, administering an invasive intramuscular injection during a state of acute agitation is a difficult task for a caregiver and often leads to increased anxiety for the patient. It presents the opportunity for potential risk of injury to the patient or the caregiver. IM injections of antipsychotics agents also carry significant negative side effects, including heavy sedation, and potential risks of acute hypertension, or severe dystonic, torticollis, or laryngospasm reactions.

Myth No. 2: Caregivers give the patient the IM injection, all is well in 10 minutes, and the patient is sent on his/her way.

On the contrary, patients are monitors for up to 24 hours after an episode. Using restraints requires additional paperwork and increase monitoring. Heavily sedated patients require monitoring. Another issue I hear about Adasuve is that caregivers will have to monitor the patient post inhalation to make sure there are no pulmonary safety issues. Well, I got news for you - patients are monitored by the caregiver regardless. Adasuve conveys no additional burdensome monitoring requirement by the caregiver.

In fact, Adasuve was specifically designed by Alexza to be a superior alternative to the slow-acting orals and the heavily sedative and undesirable injections. Adasuve was designed taking into consideration the guidelines provides by the American Association of Emergency Psychiatrists' Expert Consensus.

Guidelines for the Treatment of Behavioral Emergencies lists three key attributes for an effective medication: speed of onset, reliability of medication delivery, and patient preference. Adasuve meets all three in our view. An inhaled drug is clearly more desirable to an IM injection, and may even be easier to administer and offer great compliance than an oral tablet. The clinical data shows Adasuve begins to show efficacy onset in little as 10 minutes after inhalation. And finally, as noted above, Adasuve has a functionality rate over 99%. I believe that roughly 90% of acutely agitated patients could be effectively be treated by Adasuve.

Management believes that Adasuve can be effectively priced at $70 per unit. I believe this compares favorably with IM Zyprexa ($30 per injection) given the current reimbursement codes (per diem) and the potential to avoid restraints, caregiver injury, and heavy sedation, all which add additional costs into the system.

Myth No. 3: IM injections are cheap. No one would pay $70 for Adasuve.

Perhaps. But IM injections are not as cheap as one thinks. IM Zyprexa is $25 per shot. At $70, Adasuve is three-times the price. But the potential cost-benefit of Adasuve is that one dose usually does the trick, unlike orals. And the lack of restraints and patient monitoring post-sedation may make up the difference. What Alexza really needs to do is conduct a detailed pharmacoeconomic study to show that Adasuve is worth $70. I know Biovail, Alexza former North American partner, did work in this area. Management did not pull $70 out of a hat.

Taking all the above into consideration, I see Adasuve having peak U.S. sales at $160 million. I arrived at this estimate as follows: There are roughly 10 million patients in the U.S. and Canada with schizophrenia and / or bipolar disorder 90% experience episodes of acute agitation. About 85% of the ER hospitals or treatment centers will be in compliance with the REMS (i.e having advanced airway management abilities). Episodes occur about once per month (12x per year). 50% of the time these episodes are severe enough to seek medical treatment. Adasuve to be priced at $70 per dose. Adasuve to capture approximately 5% of the market (4% from IM + 1% from oral).

Let's do the math: 10.0 million x 90% x 85% x 12 x 50% x $70 x 4% = $160 million

For simplicity sake, I'm going to assume that the opportunity in Europe, Asia/Pacific, Latin America, and the Middle East is about the size of the U.S. market. That brings our total peak worldwide market opportunity for Adasuve to around $300 million.

Alexza filed the Marketing Authorization Application (MAA) to the European Medicines Agency (EMA) in October 2011. Alexza received the 80 assessment report in February 2012. I'd expect the day 120 notification shortly, with a decision out of the EMA late 2012 or early 2013.

...Commercial Strategy Unclear...

Alexza will need a commercialization partner to launch Adasuve in the U.S. The company has neither the capital nor the manpower to launch the product on its own. Management has noted being in discussion with potential partners on Adasuve. However, I don't see a deal until post approval. And even if the FDA approves the drug in May 2012, management still needs to ramp up the manufacturing at their facility in Mountain View, CA. Investors are probably looking at late 2012 or early 2013 before Adasuve will be launched.

In the meantime, Alexza's European / Latin America partner, Grupo Ferrer International, S.A., recently became a significant equity holder in the company. Alexza, desperate for cash at the time, agreed to eliminate a future potential milestone payment in exchange for the purchase of Alexza common stock. Ferrer purchased 2.4 million shares of Alexza common stock at $1.24 per share. And during 2012, up to an additional $8 million of Alexza common stock may be purchased by Ferrer, upon a request by Alexza and subject to acceptance by Ferrer, in exchange for the elimination of additional milestones at a price per share that will be a premium to the market price on the date of purchase. The re-working of the distribution agreement with Grupo Ferrer brings in upfront, albeit dilutive, cash to Alexza, but significantly reduces the upside.

So the commercial strategy for Adasuve remains unclear. If approved, who will launch in the U.S.? What kind of deal will cash-strapped Alexza be able to secure? How much more dilution will there be?

I'll remind investors that in February 2012, Alexza entered into an underwritten public offering of 44.0 million shares of common stock at $0.50 per share. The net $20.4 million in proceeds will help Alexza fund operations through the May 4, 2012 PDUFA, and allow management to ramp up the manufacturing to prepare for the launch. But this was a massively dilutive offering to existing shareholders. Between the offering in February 2012 and the Grupo Ferrer transaction in March 2012, Alexza's fully-diluted share count has soared.

As of April 2012, there are 116.136 million basic shares and 60+ million warrants. However, I see only the 44.0 million warrants at $0.50 per share as realistically exercisable in the foreseeable future. The rest will probably expire worthless.

So What's Alexza Worth?

Ah the daunting task of attempting to value a company that might get approved for a drug, they then may be able to partner, which many investors questions if will even sell. This is what I live for!

I have built a 10-year discounted cash flow (DCF) model taking into considering Alexza's past, current, and projected financials. I assume peak sales of Adasuve in the U.S. are $160 million. I pegged peak sales outside the U.S. at $160 million, but I also slowly raised the price of Adasuve out in 2015 and beyond. So in total, on a global basis, I have Adasuve sales peaking at $342 million in 2022. Again, this assumes 5% blended market share of the 20+ million patients experiencing episodes of acute agitation worldwide. I assume that Alexza does eventually sign a North American commercial partner for Adasuve, and that brings the company a total of $50 million in milestones over the next 10 years. I also assume that Alexza will be paid a tiered royalty of between 15% and 20% on global sales, net of the Adasuve transfer price at Alexza's manufacturing facility.

I have arrived at a discount rate of 17.0% using a 2% risk free rate, 7.5% equity risk premium, and 100% firm risk premium to account for the pre-approval scenario. I applied a 1% terminal growth rate, 30% effective tax rate starting in 2018, and 176.1 million fully-diluted share count. All this gets me to $0.60 - pre-approval. Given the trend for small biotech stocks to run-up prior to approval combined with the low stock price, and it is possible the stock goes significantly above $0.60 pre-approval. I think $0.75 is realistic.

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If the drug gets approved, I would lower my firm risk premium to 50%. Alexza is clearly not out of the woods, but the risk around the story would be dramatically less. Lowering the firm risk premium to 50% lowers my discount rate to 13.3% and raises my target to $0.90. If Alexza was then able to secure a commercialization partner on Adasuve, and even obtain a modest upfront payment of $10 to $20 million, I'd lower my firm risk premium to 25%. At that point, Alexza would have an approved drug, an approved manufacturing facility, a commercial partner, an application under review for Europe, and significant cash on the books. Taking all that into consideration, I could see fair-value at $1.15.

Source: Pivotal FDA Decision Upcoming For Alexza