ALXA is a compelling investment now that it has signed a US distribution agreement with Teva for its first approved drug , Adasuve.  Teva paid $40 million upfront, offered them a $25 million, 4% convert, up to $195 million in milestone payments and a tiered royalty payment structure. Alexza has been claiming that they will sell 3 mm units at peak sales for $75 / each which equals $225 million in peak sales.  Teva is likely to price Adasuve at $100 / dose so US peak sales are likely to be closer to $300 million.  The terms that Teva granted to ALXA strongly suggest that they believe they will get to at least $225 million in sales. $225 million in Adasuve sales suggest gross profits of $42 million from US sales alone (ignoring the partnership with Grupo Ferrer to market Adasuve in Europe where it also recently received approval).  ALXA’s enterprise value is $37 million (including the $30 million payment from Teva).  I believe that Teva will buy ALXA if the drug begins to sell according to estimates.

Investment Thesis

Alexza was started by Alejandro Zaffaroni who previously sold Alza to JNJ for $10.5 billion.  It is currently run by Tom King, who sold Anesta to Cephalon for $444 million back when the company was early in the process of launching its drugs and had 12 month trailing revenues of less than $10 million.  Investor frustration is high due to receiving two complete response letters prior to FDA approval that forced management to badly dilute shareholders.  I believe that the deal with Teva will be a turning point as Alexza will finally begin to earn revenues.

Staccato System

Alexza has a patented drug delivery platform called Staccato that aerosolizes a drug and disperses it into the user’s deep lungs.  Its advantages are that it reaches peak blood plasma concentration in less than 5 minutes (similar to using an IV), it is non-threatening (especially relative to an IV or shot) and it is convenient to use.  The company has tested a few generic drugs that could benefit from rapid onset and ease of use.  The next drug in the pipeline treats epileptics that suffer cluster seizures.  It has achieved orphan drug status and has the potential to be approved in 2017 with a company estimated peak sales of $100 - $200 million.

Adasuve – Alexza’s primary value driver

Adasuve is intended to treat bipolar and schizophrenic patients who are experiencing mild to moderate agitation.  There are approximately 8.2 million people in the US who suffer from either schizophrenia or bipolar mania.  90% of them suffer from acute agitation and approximately half seek treatment at a hospital.  These patients present at the emergency room where the ER docs traditionally decide between giving them a pill, a shot or both.  Patients prefer pills, but they take from 25 minutes to more than an hour to work, sometimes are not swallowed and all of their use is off label.  Shots work slightly faster, but docs frequently have to call in 4-5 orderlies to hold down the patient and they’re not supposed to use restraint if they can at all help it.  The current standard of care is to give patients a “B-52” 50 mg of Benedryl, 5 mg of Haldol and 2 mg of Ativan via a shot. Adasuve offers a non-invasive, fast acting option that is much less sedating.  After the patient is calm and speaks with a psychiatrist, sometimes they are discharged, other times they are admitted to an inpatient facility.  If they are admitted, they are frequently in the inpatient facility for 2-15 days and receive another several rounds of drugs. 

Adasuve will probably find a low initial utilization rate in the emergency department because the doctors need to know that the patient suffers neither from COPD nor asthma.  Since it is the same patients showing up repeatedly, the doctors/hospitals should know their medical histories fairly quickly.  The psychiatrists are likely to utilize it much more on an inpatient basis because it is less sedating than a B-52 and they want to speak with the patient in order to help them. 

It will probably see off label use with people suffering from Alzheimer’s disease, Lou Gehrig’s Disease, Parkinson’s disease and drug/alcohol induced agitation issues.  Ignoring the off label use, Teva cites 4-5 million patients per year as the number that present themselves for treatment.  If we assume that 10% of them suffer from either asthma or COPD and are therefore contraindicated , and that 15% present in a severely agitated state– we would have a treatable population of at least 3 million.  Alexza has done survey work that suggests that patients average 11-12 treatments per year.  I am modeling 10 – 2 episodes per year, 5 treatments per episode.  That implies the target market is 30 million doses.  If Teva charges $100 per dose, then the target addressable market is $3 billion.

Alexza receives a tiered royalty on sales that is probably between 10% and 25%.  Let’s assume it is a 15% royalty rate. Also, due to a drug development deal they did years ago, they owe a 3^rd party 10% of the royalties and milestones they collect on Adasuve.

Alexza has said that at scale they expect to make $4 in manufacturing profits per dose sold to Teva.

Management has said that they would be breakeven at less than 100 million of drug sales which implies a post phase 4 studies cost structure of 17.5 million.  I’m modeling 20 million because management teams always find things to spend money on.  The company has $286 million of net operating losses, so I’m modeling zero taxes. All of this ignores their European drug sales that should begin in the second half of 2013 and the potential for $195 million in milestone payments.

A few other important points. 

They have a funding gap because they are spending on post approval studies in both the US and Europe while the drug ramps.  I estimate a funding gap of up to $30 million minus milestone payments.  They should receive $8 million from Grupo Ferrer once all of the European approvals are finalized.  Their first milestone payment from Teva (of an unknown amount, but I believe to be less than $15 million) should be paid after the Phase 4 results are analyzed by June 2015.  The rest of the milestone payments are based on sales and are unlikely to be available to offset the funding gap.The company may use upfront payments from partnering Adasuve in Japan, India, China, Oceania but it will likely have to issue equity to close the remaining gap unless Adasuve ramps more rapidly than I expect.

They have 4.4 million warrants outstanding at $5 that don’t expire until February 2017.

Teva is able to pay doctors to use Adasuve as a part of their Phase 4 post marketing study.  They can pay for up to 10,000 patients to be treated which should help familiarize doctors with the drug faster than usual.

Valuation

If they achieve $225 million of US sales and $75 million of OUS sales in 2018 then they would have net earnings of $32.5 million.  If you gave them a 14x earnings multiple the company would be worth $455 million.  If you discount $455 million by 12% per year back to the present you get ~$258 million.  Fitting that to the capital structure using treasury method to get a diluted share count you get a stock price of $14.50.  This gives no specific value to their pipeline/platform.

I believe that Teva will purchase the company for less than that over the next 18 months but for a large premium to last sale.

Risks

If Adasuve were pulled from the market then I think the stock would trade down to a 20% discount to the net cash on their balance sheet or around $2.00.