Zogenix: Upcoming Catalysts Should Provide Upside

| About: Zogenix, Inc. (ZGNX)
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Catalyst trades in the biopharma sector can provide big profits if traded correctly. Some traders and investors who enjoy bringing more risk into play often times will hold through the catalyst event. While this does bring a lot more risk into play, the reward from engaging in this can be a massive one. One biopharma company that has a strong near-term catalyst event associated with it in my opinion is Zogenix Inc (ZGNX)

Zogenix engages in the development and commercialization of products for the treatment of central nervous system disorders and pain. Its commercial product includes Sumavel DosePro (sumatriptan injection), a delivery system that offers needle-free subcutaneous administration of sumatriptan for the acute treatment of migraine and cluster headache. The company's lead product candidate, Zohydro, is a single-entity extended-release hydrocodone, which has completed Phase III clinical trials for the treatment of moderate to severe chronic pain requiring around-the-clock opioid therapy.

I am most bullish on Zoegenix's Zohydro ER. The drug is an oral agent without acetaminophen and is an extended-release formulation of various strengths of hydrocodone dosed every 12 hours for around-the-clock management of moderate-to-severe chronic pain. Zohydro ER could be the first hydrocodone product to offer the benefit of less frequent dosing and the ability to treat chronic pain patients without the risk of liver injury associated with the use of acetaminophen in high dosages or over long periods of time.

If eventually approved by the FDA, Zohydro ER would be the first long-acting hydrocodone based solution that is not combined with another pain-relieving drug. Currently, hydrocodone is only available in immediate-release, combination products, most commonly with the prior mentioned analgesic acetaminophen. These products require dosing every 4 to 6 hours.

Existing hydrocodone-containing pain relievers generate about $3.5 billion in U.S. sales. Even taking a small slice of this large market, Zohydro's sales could reach $500M to $800M in my estimation.

In early September, Endo Health Solutions (ENDP) announced that a subsidiary issued a voluntary recall for one lot of its hydrocodone bitartrate and acetaminophen tablets, saying it's possible that some tablets exceed the weight specification and could be super-potent. The increased acetaminophen content could result in liver toxicity, especially in patients on other medications containing acetaminophen, patients with liver dysfunction, or people who consume more than 3 alcoholic beverages a day. Endo's drug here clearly had an issue with liver toxicity which I mention prior is a concern with acetaminophen -- all the more reason I feel Zohydro could be a potential large revenue generator for the company.

Zalicus Inc. (ZLCS) announced on August 27th that the FDA approved the supplemental new drug application (NASDAQ:SNDA) filed by Mallinckrodt Inc., a subsidiary of Covidien plc, for the 32 mg dose strength of Exalgo (hydromorphone HCl) Extended-Release Tablets (NYSE:CII), for the management of moderate to severe pain in patients requiring continuous, around-the-clock opioid analgesia for an extended period of time. Exalgo provides time release of hydromorphone throughout the day once a steady-state is achieved after three to four days. I like Zalcius's pain killing solution here, but unfortunately for the company, it receives a very small royalty from Covidien. Both Zohydro and Exalgo represent a time released solution for patients with pain who are opioid-tolerant.

The main difference between Zalcius and Zogenix here is that Zogenix might be in a position to market Zohydro itself, assuming the FDA approves the drug.

Zohydro represents a possibly un-met solution in terms of a painkiller without the harmful liver hazards associated with acetaminophen.

Catalyst 1: Minor price mover

On October 29 and 30, 2012, the Drug Safety and Risk Management Advisory Committee will (DSRMAC) discuss the public health benefits and risks, including the potential for abuse, of drugs containing hydrocodone either combined with other analgesics or as an antitussive. The Department of Health and Human Services received a request from the Drug Enforcement Administration for a scientific and medical evaluation and scheduling recommendation for these products in response to continued reports of misuse, abuse, and addiction related to these products.

The above could be a good catalyst because of the potential awareness that could be associated with Zogenix from this meeting.

Catalyst 2: The most significant price mover

Zogenix is expecting an ADCOM panel meeting in Nov/Dec 2012. I expect the stock price to run up to around $3.75 - $4.00 a share before the ADCOM meeting.

Arena Pharma (ARNA) saw its stock price move from the low $2 range up to over $3.50 a share before the ADCOM for its weight loss drug, Belviq -- Belviq was subsequently approved by the FDA on June 27, 2012. On a side note, Arena is a company I am bullish on for a long term speculation investment. If management can properly reinvest the cash it's certain to generate from Belviq into its pre-clinical pipeline, a stock price near $30 a share within 3 years is within reach in my opinion.

Catalyst 3: Potential price mover

The company also has a PDUFA date for March 1st, 2013.

Normally, traders and investors can get a good idea from an ADCOM meeting the chances of a drug actually receiving FDA approval. If the panel recommends Zohydro ER with a large majority vote in favor of, then it's a good bet the drug will be FDA approved on its PDUFA date. However, if the panel votes strongly against the drug, it's a good bet the FDA will issue a complete response letter (NYSE:CRL). If the panel splits its vote, and/or it is a close vote either way, there could be an additional move in the stock price. However, most of any pre-catayst price movemenwould be pre ADCOM in most cases.

Another positive note for the company is that it recently raised cash through dilution and paid off its debt. With that being addressed, I do not expect any additional dilution to take place between now and ADCOM. Dilution tends to cause knee-jerk reaction sell-offs, but it is not always a bad thing for a company's stock price afterwards -- as was the case with MAP Pharmaceuticals, Inc. (MAPP).

MAP's stock took the typical hit one day after the announcement of a dilution in July of this year -- the stock dropped more than one dollar to $13.02. The terms of MAP's offering was that it sold shares of its common stock in an underwritten public offering totaling 3.9 million shares at $13.40 each. MAP had 30.7 million shares on the market as of July 20.

Since MAP engaged in its offering, the stock has rallied nicely to a closing price yesterday of $15.98 -- substantially higher than the original secondary offering.

Significant institutional owners:

The two institutions above hold nearly 34% of the company's stock, which I take as a bullish sign, especially for a stock selling for under $3.00. Normally we see this type of large block institutional ownership of stocks over $5.00.

Other bullish factors that could make for a nice trade:

*Shares Short (as of Sep 14, 2012):


Short Ratio (as of Sep 14, 2012):


Short % of Float (as of Sep 14, 2012):


A 10% short interest here represents a potentially higher pre-catalyst trade, as shorts might very well feel the heat from traders getting into position for a pre-catalyst trade -- a short squeeze could be in play here in my opinion.

Stifel Nicolaus has a buy rating on Zogenix with a 12 month price target of $6.00.

Stifel Nicolaus commented,

We look to Zohydro to be the true value driver for Zogenix coming off another low quarter for Sumavel. Though the recent deal is dilutive, causing us to lower our target price to $6, Zogenix is in a better position for pipeline development, partner negotiations and eventual sales force investment.

To reiterate, Zogenix used the proceeds as referenced prior here to pay off its debt, leaving them in a good position to execute as the analyst mentions above. I am playing this one in my family's account for a catalyst trade and not for a longer term investment. I would be inclined to consider a longer term investment when and if Zohydro gains FDA approval. Furthermore, I would like to see how management handles approaching the market with the drug upon FDA approval.

Zogenix Current pps: $2.82 Up $0.06 (2.17%) Market cap: $284.86M

My price target opinion before ADCOM:

$3.50 - $4.25 a share.

*Data provided by Yahoo Finance.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.

Additional disclosure: Family member is long Zogenix

Disclaimer: This article is intended for informational and entertainment use only, and should not be construed as professional investment advice. They are my opinions only. Trading stocks is risky -- always be sure to know and understand your risk tolerance. You can incur substantial financial losses in any trade or investment. Always do your own due diligence before buying and selling any stock, and/or consult with a licensed financial adviser.