All Eyes on Alexza as Company Prepares to Re-File Drug Application

| About: Alexza Pharmaceuticals, (ALXA)
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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

In December 2010, Alexza Pharmaceuticals met face-to-face with the U.S. FDA to discuss the items raised in the agency's complete response letter issued for AZ-004 (Staccato loxapine) in October 2010. As a reminder, the CRL raised four issues in the new drug application:
1) The FDA raised concern on the clinical safety data from the three phase 1 pulmonary safety studies with AZ-004 based on observed, dose-related post-dose decreases in forced expiratory volume in one second (FEV1) in both healthy subjects and in subjects with COPD and asthma. The dose-response relates to a greater reduction in FEV1 following the second inhalation relative to the first. The agency also noted that decreases in FEV1 were recorded in healthy subjects who were administered device-only (no drug) control versions of AZ-004.
  • 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.
Alexza believes it has presented evidence that the placebo device is safe, including a blinded expert review of the flow-volume loops data from the healthy subject study as further evidence that there appears to be no consistent pattern suggestive of airway obstruction in these subjects. Alexza also provided an analysis showing that there is no meaningful temporal relationship between placebo administration and decreases in FEV1. Management believes this evidence and analysis confirms that the changes seen were likely background events in the population studied, where the repeated and extensive pulmonary function testing may have contributed to some of the observations. Management plans to include this information in the new filing for approval.
The information that Alexza has complied over the past several months on the pulmonary safety will also help develop a Risk Evaluation and Mitigation Strategy (REMS) program designed to identify potential subjects that could exhibit pulmonary safety issues on AZ-004 (e.g. patients with asthma and COPD). The FDA noted at the meeting in December 2010 that it would be reasonable to propose a REMS program for the use of Staccato loxapine, and requested that as part of the company's resubmission.
2) The CRL raised issues relating to the suitability of the stability studies undertaken by Alexza. Management conducted a 12-month accelerated and 12-month standard stability program. The proposed stability of the product is 18 to 24 months.
  • 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.
3) The CRL raised issues relating to the agency’s pre-approval manufacturing inspection.
  • 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.
4) Because AZ-004 incorporates a novel delivery system, the CRL also included input from the FDA’s Center for Devices and Radiological Health (CDRH). CDRH requested a human factors study and related analysis to validate that the product can be used effectively in the proposed clinical setting.
  • 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.
We believe management has done an excellent job in addressing the four key issues from the complete response letter on AZ-004. As noted above, three of these four issues have either already been resolved or will be resolved by the time of the re-filing in July 2011. The pulmonary safety issue remains the one key area of risk for Alexza heading into a new review cycle. However, investors probably will not have to wait until FDA action in January 2012 to see the outcome. The FDA may hold an Advisory Panel meeting prior to making a decision on approval. We expect this panel will take place in November or December 2011 if one is instituted. We will know more about the potential for a panel meeting by September 2011. This will give management an opportunity to present further analysis of the pulmonary safety findings to the committee for open discussion.
We clearly view the advisory panel meeting as a positive outcome for Alexza. It allows management the opportunity to address the risk and benefits of the device with the agency in an open back-and-forth manner as opposed to another CRL or filing. That being said, no panel meeting might believe the FDA has no issues that need to be address. We think this is a stock investors should be buying now, as we see the stock at $3 heading into the potential approval of AZ-004.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.