We are upgrading our rating on shares of Alexza Pharmaceuticals (NASDAQ:ALXA) to "Outperform" and raising our price target to $3 per share. We believe the company is on track to re-file the new drug application (NDA) on AZ-004 (Staccato loxapine) for the treatment of acute agitation in patients with schizophrenia or bipolar disorder by the end of July 2011. Based on our analysis of the complete response letter (CRL) received on October 8, 2010, and our numerous conversations with management, we believe Alexza is adequately prepared to file a full response with an excellent chance to receive approval in January 2012.
We believe the company is addressing (or has already addressed) all the key issues in the October 2011 letter. We expect the shares to begin to trade higher over the next few months in anticipation of the re-file in July 2011. Then, we expect the shares to continue their run higher toward the FDA action date in January 2012 (assumes the re-file in July 2011 with a six-month review). We note the potential for an FDA advisory committee review of the AZ-004 application potentially in late 2011 could act as a major catalyst for the shares.
On the fourth quarter conference call, CEO Tom King noted that the ideal time to re-partner AZ-004 is around the time of the NDA filing. The company noted that previously firms were not interested in AZ-004 because they wanted more than just the North American rights. Management has noted being in 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 when the company selected Biovail (BVF). 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, 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 deal with Biovail included $40 million upfront. 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 partner can be involved in the submission. This is yet another potential major catalyst for the shares in 2011.
Some Background on the CRL
- Alexza has spent the past few months analyzing the data from the pulmonary safety programs and from the phase 3 trial. The company hired outside consultants to help analyze if there is a safety concern with Staccato or AZ-004. Some of the key points that management made in its discussion with the FDA: All respiratory symptoms that developed after treatment in the phase 1 study were either self-limiting (resolved spontaneously) or readily managed with an inhaled bronchodilator. No intravenous intervention was necessary due to respiratory side-effects in either the phase 1 pulmonary safety study or the pivotal phase 3 program. There were no serious adverse events (SAEs) in the phase 1 or the phase 3 pivotal program. Respiratory events in the phase 3 program (~750 patients) were less than 1%. During the clinical trials, use of standard bronchodilators was prohibited while on drug.
- We note that the supply chain for the Staccato device has changed dramatically over the past 24 months. Management noted a number of component suppliers (many overseas) going out of business. Management has shifted around the manufacturing piece of the device from small (unreliable) firms to larger (financially stable) organizations. Alexza has also brought final assembly of the device in-house. This includes the foil wrap film that surrounds the device. The FDA questions the suitability of the data because many of the suppliers used to collect the data have changed. Alexza has begun a new accelerated and standard stability program following the CRL in October 2010. Sufficient data should be collected in time for a re-file in July 2011. Management also noted that it can seek approval with a lower shelf-life, of say 18 months, and then supplement post approval to bring the shelf-life up to the desired 24 months. This is a non-issue in our view.
- We note the first facility inspection was only recently completed in August 2010. Management submitted a response to the FDA’s questions in September 2010. Much of this information was not included in the CRL letter. Questions following a pre-approval manufacturing inspection, especially for a brand new drug-device combination, are common. Alexza believes that all of the questions on the pre-approval manufacturing inspection have already been addressed. We expect another facility inspection during the second half of 2011. Similar to the stability issues, we do not believe this is a significant or rate-limiting issue.
- Alexza did not submit a standard human factor study as part of the new drug application. Instead, management submitted data from over 1,600 patients in the clinical setting, including roughly 750 patients from the phase 3 pivotal program, with 100% successful use. According to management, the protocols for these studies are pretty straightforward with clearly validated endpoints. The operation of the trial can be outsourced to a third party organization that handles these programs and conducted rather quickly. Alexza has been in conversation with a handful of these “FDA approved” centers and plans to begin the study shortly. A Human Factors Study in approximately 30-40 patients can be completed in less than two months time at a cost of less than $500K. We do not believe this is a significant or rate-limiting issue. This data will be included in the re-filing to take place in July 2011.