ALEXZA PHARMACTCLS INC ALXA
June 11, 2013 - 5:21pm EST by
Handley
2013 2014
Price: 4.62 EPS N/A N/A
Shares Out. (in M): 17 P/E N/A N/A
Market Cap (in $M): 80 P/FCF N/A N/A
Net Debt (in $M): -43 EBIT -9 -28
TEV ($): 37 TEV/EBIT N/A N/A

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  • Pharmaceuticals
  • Potential Sale
  • Royalties
  • Shareholder Base Rotation
 

Description

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.

 

Patients that present themselves for treatment

            4,000,000

% that are contra indicated

   

25.0%

Treatable Patients

     

            3,000,000

Episodes per year

     

2

Average number of treatments per episode

5

Target market (doses)

   

         30,000,000

Price / Dose

     

100

Total Addressable Market

   

   3,000,000,000

 

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 3rd party 10% of the royalties and milestones they collect on Adasuve.

Market Share

   

2%

5%

8%

10%

15%

20%

Doses

       

               600,000

         1,500,000

         2,400,000

           3,000,000

           4,500,000

           6,000,000

Drug Sales

     

         60,000,000

    150,000,000

    240,000,000

       300,000,000

       450,000,000

       600,000,000

Royalty Rate

between 10-25%

15%

15%

15%

15%

15%

15%

Gross Royalties

   

            9,000,000

       22,500,000

       36,000,000

         45,000,000

         67,500,000

         90,000,000

10% Royalties payable to Symphony

               900,000

         2,250,000

         3,600,000

           4,500,000

           6,750,000

           9,000,000

Net Royalties

   

            8,100,000

       20,250,000

       32,400,000

         40,500,000

         60,750,000

         81,000,000

 

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

Manufacturing gross margin per dose

 

 $                   4.00

 $                4.00

 $                4.00

 $                   4.00

 $                   4.00

 $                   4.00

Doses

       

               600,000

         1,500,000

         2,400,000

           3,000,000

           4,500,000

           6,000,000

Gross Margin from manufacturing

 

            2,400,000

         6,000,000

         9,600,000

         12,000,000

         18,000,000

         24,000,000

                     

 

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.

         

2%

5%

8%

10%

15%

20%

Net Royalties

   

            8,100,000

       20,250,000

       32,400,000

         40,500,000

         60,750,000

         81,000,000

Gross Margin from manufacturing

            2,400,000

         6,000,000

         9,600,000

         12,000,000

         18,000,000

         24,000,000

Total Gross Margin

 

         10,500,000

       26,250,000

       42,000,000

         52,500,000

         78,750,000

       105,000,000

                     

R&D

       

         10,000,000

       10,000,000

       10,000,000

         10,000,000

         10,000,000

         10,000,000

S,G&A

       

         10,000,000

       10,000,000

       10,000,000

         10,000,000

         10,000,000

         10,000,000

Total Opex

     

         20,000,000

       20,000,000

       20,000,000

         20,000,000

         20,000,000

         20,000,000

EBIT

       

         (9,500,000)

         6,250,000

       22,000,000

         32,500,000

         58,750,000

         85,000,000

Taxes

       

0

0

0

0

0

0

Net Earnings

     

         (9,500,000)

         6,250,000

       22,000,000

         32,500,000

         58,750,000

         85,000,000

 

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.

I do not hold a position of employment, directorship, or consultancy with the issuer.
I and/or others I advise hold a material investment in the issuer's securities.

Catalyst

 
    sort by    

    Description

    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.

     

    Patients that present themselves for treatment

                4,000,000

    % that are contra indicated

       

    25.0%

    Treatable Patients

         

                3,000,000

    Episodes per year

         

    2

    Average number of treatments per episode

    5

    Target market (doses)

       

             30,000,000

    Price / Dose

         

    100

    Total Addressable Market

       

       3,000,000,000

     

    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 3rd party 10% of the royalties and milestones they collect on Adasuve.

    Market Share

       

    2%

    5%

    8%

    10%

    15%

    20%

    Doses

           

                   600,000

             1,500,000

             2,400,000

               3,000,000

               4,500,000

               6,000,000

    Drug Sales

         

             60,000,000

        150,000,000

        240,000,000

           300,000,000

           450,000,000

           600,000,000

    Royalty Rate

    between 10-25%

    15%

    15%

    15%

    15%

    15%

    15%

    Gross Royalties

       

                9,000,000

           22,500,000

           36,000,000

             45,000,000

             67,500,000

             90,000,000

    10% Royalties payable to Symphony

                   900,000

             2,250,000

             3,600,000

               4,500,000

               6,750,000

               9,000,000

    Net Royalties

       

                8,100,000

           20,250,000

           32,400,000

             40,500,000

             60,750,000

             81,000,000

     

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

    Manufacturing gross margin per dose

     

     $                   4.00

     $                4.00

     $                4.00

     $                   4.00

     $                   4.00

     $                   4.00

    Doses

           

                   600,000

             1,500,000

             2,400,000

               3,000,000

               4,500,000

               6,000,000

    Gross Margin from manufacturing

     

                2,400,000

             6,000,000

             9,600,000

             12,000,000

             18,000,000

             24,000,000

                         

     

    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.

             

    2%

    5%

    8%

    10%

    15%

    20%

    Net Royalties

       

                8,100,000

           20,250,000

           32,400,000

             40,500,000

             60,750,000

             81,000,000

    Gross Margin from manufacturing

                2,400,000

             6,000,000

             9,600,000

             12,000,000

             18,000,000

             24,000,000

    Total Gross Margin

     

             10,500,000

           26,250,000

           42,000,000

             52,500,000

             78,750,000

           105,000,000

                         

    R&D

           

             10,000,000

           10,000,000

           10,000,000

             10,000,000

             10,000,000

             10,000,000

    S,G&A

           

             10,000,000

           10,000,000

           10,000,000

             10,000,000

             10,000,000

             10,000,000

    Total Opex

         

             20,000,000

           20,000,000

           20,000,000

             20,000,000

             20,000,000

             20,000,000

    EBIT

           

             (9,500,000)

             6,250,000

           22,000,000

             32,500,000

             58,750,000

             85,000,000

    Taxes

           

    0

    0

    0

    0

    0

    0

    Net Earnings

         

             (9,500,000)

             6,250,000

           22,000,000

             32,500,000

             58,750,000

             85,000,000

     

    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.

    I do not hold a position of employment, directorship, or consultancy with the issuer.
    I and/or others I advise hold a material investment in the issuer's securities.

    Catalyst

     

    Messages


    SubjectRE: questions
    Entry06/12/2013 12:45 PM
    MemberHandley

    1)      1) I

    1)      1) I have two thoughts on the short interest.  The borrow desk I spoke with said that the largest short was a quant fund.  That might have been due to Alexza having only enough cash to last until Q2 2013 prior to signing the deal with Teva.    My other thought is that one of the main shareholders was Occitan, a derivatives hedge fund that recently shut down.  There were a very large number of put options outstanding that they probably initiated to protect themselves as they liquidated their position.  It is likely the option market makers were short the stock to hedge out the puts they were short.  If the short interest doesn’t decline fairly soon then explanation number two can be ruled out.

    The best reason to be short the stock would be if you think that Adasuve will be pulled from the market.  Adasuve is generic loxapine (which has been used millions of times) that is inhaled into the deep lungs.  The path where Adasuve is pulled is one where the drug is given to an asthmatic despite being contraindicated for use in people who have asthma.  Asthmatics have a 50% chance of having bronchospasms if they use Adasuve. Bronchospasms require a puff of albuterol to control.  The nightmare scenario is that the drug is given to an asthmatic, the asthmatic goes into bronchospasms, the doctors and nurses have already left the room (which is unlikely since the patient would quickly go into bronchospasms if they were to do so at all), and then the staff ignores the patient because the emergency room is so busy for a long enough period of time that the person dies.  Remember, this is an agitated, psychiatric patient – one is supposed to be keeping decent tabs on them drugs or no drugs.  In the trials they gave two doses per day to asthmatics and none of them took more than albuterol to make them feel better.  The label only allows for once a day use.  It is a risk, but the facilities will have mechanical ventilators which should give an extra layer of protection even if they leave them alone for a long time.

    If anyone knows a better short thesis I would love to understand it.

      

    2) I’m really not sure.  The company believes that a portion of their shareholder base is focused on taking milestone risks as opposed to commercialization risks.  In addition, Occitan was a 5%+ shareholder who liquidated their entire position because they shut down the fund.  Teva was actually the second company to come to the conclusion that the drug is valuable.  The first was Biovail, who paid $40 mm upfront in February 2010 with $90 million in milestones and a 10-25% royalty rate .  After Biovail was acquired by Valeant, Alexza got a complete response letter from the FDA and Valeant made the decision to exit from the partnership rather than idle a specialty salesforce and wait for approval.


    SubjectRE: Qs
    Entry06/12/2013 12:50 PM
    MemberHandley

    At the FDA PDAC meeting one of the speakers was a medical professor at Duke who told his story and then asked for approval for home use.  With 10,000 patients the study will be powered enough to demonstrate whether Adasuve should be able to be used at home (where there might be a large amount of pantry stocking sales) or at a minimum in ambulances by EMTs.

     

    The next drug Alexza is working on is one that would be used at home for people who suffer from cluster seizures.  It has orphan drug status but is only in phase 2 though. 


    SubjectRE: RE: My Findings
    Entry07/16/2013 12:32 PM
    Memberclancy836
    I'm a neurologist by training and am also somewhat skeptical that this will become widely used.

    It's easy, fast, effective, and low cost to give a jab of the good ol "5 and 2" and there is a great deal of experience and comfort with this. You can always avoid Ativan or Benadryl if you really want less sedation, and an atypical antipsychotic like loxapine is also sedating (that's kind of the idea). Any ED nurse worth his/her salt can easily give an IM shot to an agitated patient, and this is actually likely to be a lot faster and more feasible than compelling an agitated person to cooperate with using an inhaler.

    Also keep in mind that the population that is brought to the ED acting crazy are virtually all "patient pay". (meaning they're uninsured, and the hospital has to treat them & then attempt to bill them personally, fail to collect and lose money on the encounter, while still being vulnerable to malpractice suits from a particularly litigious set of people). Switching to an expensive nebulizer with black box warnings is likely not to be a great business decision.
     
    I suppose one niche could be that typical antipsychotics like Haldol are contraindicated in some patients such as those with Parkinson's disease. But there are already plenty of effective IM, IV and sublingual formulations of atypical antipsychotics including loxapine itself.

    All that said; I've often been surprised when pharma marketing efforts have succeeded at pushing interventions that are costly, complicated and unnecessary. We don't have the highest costs in the world for nothing.
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