Since providing a detailed overview of Avenue Therapeutics (NASDAQ:ATXI) in early February, the stock has done virtually nothing. In fact, shares briefly fell below $5 before rebounding strongly after the company’s second Phase 3 results were positive. At roughly $6 per share, the company still offers the opportunity for a 132% return in roughly 18 months. Although Avenue may not offer the uncapped upside of a typical biotech due to the structure of its acquisition by Cipla, I believe a 132% return + a contingent value right (“CVR”) in 18 months is a steal for an asset that is largely de-risked. Let’s take a look at the recent updates and why I believe shares continue to offer an asymmetrical return profile.
I previously deeply analyzed Avenue’s prospects, but for those who want the cliff notes, here is a run down on Avenue and its drug candidate, IV tramadol.
In order to get a broad label (able to use the drug to treat different conditions/patients), analgesic therapies like tramadol typically need multiple Phase 3 studies. In the case of tramadol, Avenue wants a label claim for moderate to moderately severe post-operative pain, so the company needed to run two studies: one in hard tissue and one in soft tissue. Avenue’s hard tissue study followed patients who were infused with the drug following bunionectomy surgery, known as one of the most painful hard tissue procedures. The study resulted in statistical superiority to placebos (important because placebo plays a large role in pain management) and demonstrated a strong safety profile.
Last week, management reported on the company’s Phase 3 study in abdominoplasty, a painful soft tissue surgery. Not surprisingly as tramadol already has a body of evidence from its 20+ years of usage in the US, the drug achieved its primary end point of statistically superior pain relief versus a placebo as measured by Sum of Pain Intensity Differences over 24 hours. In addition, the drug achieved its key secondary endpoints in measurement of Patient Global Assessment at 24 hours, Sum of Pain Intensity Differences over 48 hours, and total consumption of rescue medication over 24 hours.
Unlike the first Phase 3 study, Avenue also added a comparator arm dosing patients with IV morphine. IV tramadol demonstrated similar efficacy benefits as IV morphine with a generally better, though not statistically significant, adverse reaction profile to IV morphine.
Source: ATXI IR
Overall, the safety data for the abdominoplasty surgery was actually slightly better than the bunionectomy study. The vast majority of patients who experienced adverse events did so in the Grade 1 or 2 category (mild/moderate) while only 2 patients suffered a Grade 3 event (4 patients did so in the prior Phase 3), and no patients suffered a Grade 4 event.
IV tramadol works, and the timing of the completion should give the company a good six months with a month or two of buffer to file its new drug application (“NDA”) with the FDA. The FDA will review the drug in 10 months, so I would anticipate, barring another government shutdown, that IV tramadol receives a PDUFDA date between September and November, depending on the actual submission date.
I think there are a few drivers of the valuation gap, and CEO Lucy Lu even commented on one during the Phase 3 update call. From an IR perspective, Avenue has not been promotional. They don't do investor conferences, and I do not believe management is trying to actively cultivate shareholders. Why would they? Avenue has two full-time employees, and their top priority now is to get the drug approved while meeting the proper specifications. The exit strategy is in place, and realistically, who cares what happens to the share price in the interim?
Additionally, I believe investors remain wary of opioids. Who can blame them? INSYS Therapeutics (INSY) recently filed for bankruptcy after losing a settlement over its sublingual fentanyl, and opioid manufacturers across the US are facing litigation on a variety of fronts. I think explaining to any investor that you own a company with one product, which is an opioid, would be a great way to lose that investor’s confidence.
Lastly, Avenue is tiny. With a market capitalization of $99 million, there are simply not a lot of investors who can 1.) enter a meaningful position in the company and 2.) fit Avenue into their style mandate. This creates a great opportunity for individual investors and those with permanent capital.
In the past four months, the positive results from the abdominoplasty Phase 3 trial have eliminated most remaining clinical risk, though I believe the body of evidence supporting tramadol made a negative trial outcome a low probability event. Further, the timeline of the Phase 3 completion means the company is on-track to file before the end of the year, providing ample time to receive approval from the FDA with its 10-month approval cycle. The stock may look like dead money at times, but over the next 18 months, I cannot think of an investment with such a known risk/reward profile.
Unlike most biotech companies, Avenue's outcome is unlikely to be binary. Given the high likelihood that the therapy is approved based on its safety and efficacy, the primary risk to Avenue is rescheduling of tramadol to Schedule 2. This would not make much sense as the current oral therapy, which is a pill and thus more accessible outside of an acute setting, is already a Schedule 4 drug. IV therapies are less likely to be used outside of an acute setting, and therefore, I doubt the DEA would consider IV tramadol to have a higher risk profile that oral tramadol. With all of the opioid backlash over the past few years, I think the DEA would have rescheduled the drug if it thought tramadol warranted a stricter scheduling.
Therefore, in my downside case where the DEA reschedules tramadol, I believe shares are still worth around $2.66 based on a $50 million valuation for the entire company. Much like IV acetaminophen, a drug long used as an oral therapy that came to market in a new IV formulation, there will be physician demand for the product, and thus I believe a company will find value in the asset.
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Disclosure: I am/we are long ATXI. 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.