Thursday, 11 July 2013

Grim Near-Term Prospects For Zogenix: Bioassociate for SeekingAlpha

Bioassociate's latest Seeking Alpha article is on Zogenix Inc. Below is a re-run of the article, and the original can be found here

Zogenix (ZGNX) is still awaiting a response from the FDA for the approval of Zohydro ER, after the agency has delayed the scheduled approval decision date of March 1st. Zohydro ER is Zogenix's lead product - hydrocodone bitartrate (opioid painkiller) extended-release capsules for the management of moderate-to-severe chronic pain. Zohydro ER brings two novelties to the current hydrocodone market: (1) twice-daily administration, compared to 4 times a day of current, immediate-release, hydrocodone containing pills; (2) Most importantly, Zohydro ER is a single-entity hydrocodone pill that does not contain acetaminophen. According to Zogenix, the absence of acetaminophen enables patients to avoid the risk of liver injury associated with the use of acetaminophen in high dosages or over long periods of time.
There is no doubt that a need exists for a drug like Zohydro ER in the immense chronic pain market. However, the fact of the matter is that it is quite certain the FDA will not approve Zohydro ER. To make things even worse for Zogenix, even the unlikely event of FDA approval of Zohydro ER will not bring Zogenix's stock price out of the mud, due to the company's feeble financial status and the competitive landscape for Zohydro ER.
Why the FDA will not approve Zohydro ER:
1. The FDA advisory committee voted against recommending the approval of Zohydro ER: Zohydro ER was the first pure hydrocodone (acetaminophen-free) drug candidate to face an FDA advisory committee. In December 2012, the FDA's Anesthetic and Analgesic Drug Advisory Committee of independent experts voted 11 to 2 (with one abstention) against recommending the approval of Zohydro ER. The panel was sharply divided on safety and efficacy, but almost unanimous about the concern over the drug's potential for addiction.
Historical data show a very clear image: when an FDA advisory panel recommends against approval, the FDA rarely reverses the decision. In fact, such reversal happened only on 3 occasions in recent years. This means that according to past statistics there's a very slim chance the FDA will approve Zohydro ER.
2. Zohydro ER is likely to produce the next wave of substance dependence and abuse: opioid drugs, such as hydrocodone and oxycodone (Vicodin, Oxycontin, Percocet), are highly addictive substances that produce abuse-related effects. The Center for Disease Control and Prevention [CDC] reports that around 15,000 Americans die each year from prescription painkillers, such as Oxycontin and Vicodin, with teens comprising a fifth of the victims.
If approved by the FDA and marketed, Zohydro ER could cause dependence and be abused, possibly at a greater rate than that of currently available hydrocodone-acetaminophen combination products, mainly because it contains a much larger dose of hydrocodone (up to 50 mg of pure hydrocodone compared to up to 10 mg in Vicodin).
3. Zohydro ER is not an abuse deterrent product: misuse and abuse of opioid drugs involve physical or chemical manipulations to increase the concentration or bioavailability of the active ingredient, usually for administration via snorting and injections. In recent years, abuse deterrent technologies have been developed and implemented in opioid drugs.
A recent example is the FDA's approval of Purdue Pharma's reformulated abuse-deterrent OxyContin in April 2013. Importantly, along with the approval of the abuse-deterrent Oxycontin, the FDA has determined that the benefits of original OxyContin no longer outweigh its risks and that original OxyContin was withdrawn from sale. Accordingly, the agencyannounced it will not approve any generic versions of original OxyContin.
The absence of abuse-deterrent technology in Zohydro ER further supports the likelihood of this drug's abuse once it reaches the market.
4. The FDA is currently campaigning against abuse and misuse of prescription opioid drugs: The prescription opioid drug abuse epidemic and its consequences are well known to the FDA. Apart from the agency's barring of non-abuse-deterrent OxyContin formulations (see #3 above) from entering the market, the FDA is amidst an overall move towards abuse-resistant narcotics that includes:
  • On January 2013, the FDA issued draft guidance on abuse-deterrent opioids.
  • In the same month, the Drug Safety and Risk Management Advisory Committee met to discuss the abuse potential of hydrocodone drugs (like Zohydro ER) and voted in favor of rescheduling hydrocodone from Schedule III (moderate-to-low potential for physical and psychological dependence) to Schedule II (high potential for abuse) of the Controlled Substances Act.
  • The FDA is under an ongoing political and public pressure against abuse of opioid drugs, coming from pain and drug addiction specialists, the Coalition Against Prescription Drug Abuse, Advocates for the Reform of Prescription Opioids, and families of opioid drugs victims. In addition, a "Stop Tampering of Prescription Pills" Act [STOPP] was introduced to the US Congress, suggesting forcing the FDA to bar new drug applications for orally administered opioids that do not use abuse deterrent formulations.
In its current formulation, Zohydro ER has no protections against abuse and can be easily converted into a large dose of hydrocodone. In the current atmosphere, both within and outside of the FDA, Zohydro ER is an un-approvable drug.
Zohydro ER approval should not affect Zogenix's stock:
1. Upcoming dilution: regardless of the FDA's verdict, Zogenix's financial status calls for an immediate financing round. As of the end of March 2013, the company had cash reserves of ~$25m and an average quarterly burn rate of $15m. This means that by the end of Q2 2013, Zogenix will have only $10m in the bank. A sign for Zogenix's financial stress was the layoff of nearly 40% of its work staff during June, in an effort to conserve cash until the expected announcement from the FDA.
2. Other products will not save the day: Zogenix's first commercial product, Sumavel DosePro - a needle-free sumatriptan injection for the acute treatment of migraine, was launched in early 2010. Sales figures of Sumavel DosePro have been disappointing so far, with stagnation in quarterly revenues (around $8m) in the last 4 quarters, which yield a gross profit of under $4m per quarter. It looks like Sumavel DosePro will not push Zogenix towards profitability.
3. Limited market opportunity for Zohydro ER: an FDA approval of Zohydro ER will come with tight restrictions that will restrain Zogenix from achieving profitability. More importantly, it is very likely that once abuse-deterrent formulations of single-entity hydrocodone pills will be approved (see in #4 below), Zohydro ER will be pulled from the market, as was the case with Oxycontin.
4. Superior competition is around the corner: three pharmaceutical companies are currently in final stages of developing their own versions of extended-release single-entity hydrocodone, with abuse deterrent technologies. Pharma giants Teva Pharmaceuticals and Purdue Pharma will be completing phase III studies with long-acting hydrocodone pills by the end of 2013, and are expected to launch their products by the end of 2014. The Danish company Egalet is also developing a tamper-resistant hydrocodone product that could reach the market by 2015. The launch of superior alternatives to Zohydro ER by industry leaders will leave Zogenix with a very short time to generate revenues from Zohydro ER before this market segment will be taken over.
The bottom line is that the chances for an FDA approval of Zohydro ER are very slim. Nevertheless, even with FDA approval for Zohydro ER, Zogenix might not reach profitability due to limited revenue generation. Combined with the company's current shaky financial status, Zogenix's stock is not expected to rise in the near future.

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