A Confusing FDA Decision Has Created A Buying Opportunity In Egalet

| About: Egalet Ltd. (EGLT)
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Limitations on how Egalet can label its new drug have spooked investors.

A clearer understanding of the FDA's action makes its decision far less onerous.

The limits placed on the label should disappear late next year.

The limits are probably easily surmountable by an effective salesforce, too.

The shares of biopharmaceutical concern Egalet (NASDAQ: EGLT) have sold off dramatically since January 9, 2017, which, ironically is the day the Food and Drug Administration approved its lead new-drug prospect Arymo ER. Trading activity in the microcap stock was bizarre that day, reflecting the poor timing of the FDA's announcement, the initial release of incomplete information, and the poor execution of a trading halt by Nasdaq. As such, some lucky investors were able to get out at prices nearly double the current quotation, whereas their unlucky counterparts got in at what has proved to be terrible levels. That said, the question now for both those still holding the shares and others contemplating opening a position is: What now? A fellow contributor on Seeking Alpha recently offered some answers in his reasonably comprehensive article entitled Egalet: A Promising Company Currently On Sale. That said, the author did omit a few very important facts, some of which were briefly noted in the comments section by a couple of astute readers. In this article, we review the relevant omissions in greater detail and add our views on the stock. We'll keep it relatively short, though, relying on Tim Harrison's work to provide readers with much of the background information on the company. As well, we would be happy to email a copy of a roughly 10-page report we sent to our subscribers about six months ago. (In the interest of full disclosure... we hold a small position in EGLT, purchased around then.)

The Fly in the Ointment

Egalet stock's price initially rose after news broke that U.S. regulators had approved Arymo ER (morphine sulfate) extended-release (ER) tablets C-II for the management of pain severe enough to require daily, around-the-clock, long-term opioid treatment and for which alternative treatment options are inadequate. The stock reversed course sharply when it came to light that the FDA permitted Arymo ER to be labeled as an abuse-deterrent product only by the intravenous route of abuse. Investors had hoped the label would also include the oral and nasal routes of abuse.

It's A Small Fly With A Short Life

The regulator's decision to deny Egalet the "nasal" route of abuse label was shocking to all close followers of the company, including management, considering both the data from all of the clinical trials and the recommendations made by two of FDA's Advisory Committees last summer. As a reminder, the panelists of that committee voted as follows:

Ø By a count of 18 to 1, they voted in favor of recommending the FDA approve Arymo ER for the management of pain severe enough to require daily, around-the-clock, long-term opioid treatment and for which alternative treatment alternatives are inadequate;

Ø By a count of 16 to 3, the committees voted that if approved, Arymo ER should be labeled as an abuse-deterrent product by the oral route of abuse;

Ø By a count of 18 to 1, the committees further recommended that the drug be labeled as an abuse-deterrent product by the nasal route of abuse; and

Ø By a count of 18 to 1, they also recommended that the drug be labeled as an abuse-deterrent product by the intravenous route of abuse.

According to Bob Radie (see transcript of January 9th teleconference), the company's president and chief executive officer, a key consideration in the denial was the FDA's granting, in November 2016, rival product MorphaBond three-year exclusivity for the intranasal route of abuse. Significantly, though, even though MorphaBond - developed by tiny, privately-owned Inspirion Delivery Technologies - was approved in October 2015, it is yet to be commercialized. An October 25, 2016, marketing agreement between Inspirion and Japan-based Daiichi Sankyo, Inc. (OTCPK:DSKYF) suggests MorphaBond could be launched in the near future, but it's also important to note that the aforementioned exclusivity expires on October 2, 2018, at which point Egalet will be able to include the clinical data from its intranasal abuse potential study in its label.

Very little information emanates from Inspirion and Daiichi, so it's tough to know when their product will be launched. Egalet, in the meantime, has been preparing to commercialize Arymo ER for some six quarters and has an in-house salesforce that's poised to hit the ground running; a launch is imminent. As such, we think there's a real possibility that Arymo ER could have the first-to-market advantage. Beyond that, we would note the following: Morphine is the most commonly prescribed extended-release opioid in the United States and more than 98% of the roughly 6.4 million prescriptions written annually are for products that are not abuse-deterrent; the intravenous route is the most common and most dangerous route of abuse for morphine products; and none of the currently commercialized abuse-deterrent extended release morphine products have an official IV claim. Given this, there's ample opportunity for both Arymo and MorphaBond to convert physicians and patients from products that are easily abusable to their nonabusable formulations. Significantly, even though Egalet won't be allowed to include the intranasal data on its label for now, there's nothing to prevent its sales reps from discussing with potential prescribers the results from the clinical trials and pointing out the Advisory Committees' recommendations - all of which is public information.

Undervalued Stock

In his article, Tim Harrison states "The stock may test its November and July lows of around $4.50, but there seems to be strong support around this level, so downside risk is probably limited." The author notes Egalet's three FDA approved products, a "promising pipeline," and the cash on hand. With regards to the last two items, we think a more detailed elaboration would be helpful. At the end of last September, cash on the company's balance sheet totaled $101.2 million. Assuming losses totaled about $25 million, Egalet ended 2016 with approximately $76 million. Add in the $40 million that it received January 18th, triggered by the FDA approval of Arymo, cash on hand at present should approximate $105 million to $110 million. The number of shares outstanding, in the meantime, was 25.2 million, as of November 8, 2016. This equates to about $4.15 to $4.35 a share in cash. As for the pipeline, Egalet's success in shepherding the Arymo ER NDA (New Drug Application) through the FDA's review gauntlet and the validation of the company's Guardian technology augur well for the other drugs that are being developed.


The opportunity for ADF (Abuse Deterrent Formulations) of morphine sulfate is substantial, with a market that's certainly large enough to make both MorphaBond ER and Arymo ER commercial successes. A label that doesn't have the nasal route of abuse is a competitive disadvantage for Arymo, but it may not prove that serious since MorphaBond's exclusivity is relatively short-lived and Egalet's sales reps can easily explain that away. The company also has the cash resources on hand to sustain both its commercial operations and clinical development program into next year without having to return to the capital markets. Importantly, Egalet is on schedule to submit an NDA for its next product in a few months, meaning it could have four drugs in the marketplace by early 2018. In the meantime, a market capitalization ($124 million) that's only about $20 million above the cash reserves suggests there's very modest downside risk and significant capital appreciation (or recovery) potential.

Disclosure: I am/we are long EGLT.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.