In today's offering from Divich & Foley of Integrity I.R., we examine an issue in the biotechnology space that has caught our analyst's eye, a new drug that seeks to improve on a widely used drug with better-mousetrap design and delivery. Factor in the relatively small size of its creator and the potential for the equity to appreciate warrants a close monitoring.
Integrity Investor Relations' Senior Partner and Lead Analyst Daniel Foley explains our firm's interest in Zogenix In. (ZGNX).
"Zogenix's Zohydro has two major advantages over the current forms of hydrocodone selling in the marketplace," states Foley."First, Zohydro, the company's lead product candidate, 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. The extended delivery means it will provide longer therapy dosage levels than exist for standard immediate release hydrocodone today.Additionally, it is specifically formulated without acetaminophen (APAP). The FDA has recently issued a warning related to (hepatic) liver toxicity related to large doses or even low long term doses of APAP and has asked makers of hydrocodone compounds to reduce the level of APAP formulation in combination drugs containing APAP from 500mgs down to 325mgs.I believe given the toxicity history and number of adverse events associated with APAP, including Johnson & Johnson's (maker of Tylenol branded APAP)(NYSE: JNJ) recent and past troubles,the FDA has been waiting for a APAP free formulation of hydrocodone for some time."
Timing for investors could be critical as well. The PDUFA date is March 1, 2013, so for investors looking for a short term, binary event driven stock which could move meaningfully, this may be it.
Foley's research suggests that Zogenix is ahead of other competitors TEVA (NYSE: TEVA), Purdue Pharma (private) and Egalet (private). TEVA announced a negative study around their tamper-deterrent hydrocodone single-entity product that would have been a potential competitor to Zohydro on their first quarter call.Purdue and Egalet appear to be at least a couple of years away which leaves ZGNX with a wide open market should it be approved.Zohydro would launch in Q2'13, again giving it the only approved single entity extended release product on the market
Foley does see a drawback to Zohydro's virtues. The drug is not tamper resistant which could lead to some concerns or resistance in the market.
"The other slight negative is that ZGNX has not defined a robust marketing plan for the drug yet," adds Foley. "They have a sales force in place for Sumavel DosePro ® but the company believes this sales force would have to be expanded to effectively represent Zohydro.Another option would be to partner with a bigger company to distribute the product. Given TEVA's recent failure they or any number of drug makers looking to cash in on the highly lucrative pain management market might be a candidate at the plate for Zohydro."
These concerns aside, Foley sees an enormous market opportunity for Zohydro should it be approved as he expects.
"Based on our research we estimate a nearly $4.3 billion market for Hydrocodone Extended Release and Immediate release, both single entity and combined products," says Foley."We expect the single entity/extended release hydrocodone to be roughly 6% of the total hydrocodone prescriptions written by 2017 (as compared to 13% of the oxycodone single entity extended release prescriptions written) but roughly 44% of the total dollar volume of hydrocodone prescriptions written. This is due to the patented brand nature of the drugs and the ability of the drug makers to charge a premium price until the patents expire and the experience in the market of OxyContin which grew to become a large player in the Oxycodone market. "
Further, Foley does not believe Zogenix will likely face significant pressure as it relates to an abbreviated new drug application (ANDA) from generic makers."While hydrocodone in and of itself is not a unique compound, the specific formulation as a single entity compound without APAP (acetaminophen) and the combination with Alkermes (NDAQ: ALKS) SODAS® extended release technology creates a robust new compound that appears defensible in the face of an ANDA."
Foley believes that Zohydro has the potential to be a commercial blockbuster for relatively small Zogenix. "While the company has given no guidance, we have done a market analysis using data supplied by the company and from various medical journals and governmental resources to estimate the market opportunity," Foley explains.
"We use a dual phased market share model, which examines the drug itself in the context of the overall hydrocodone prescription drug market and the drug in the context of a single entity extended release drug as a subset of all hydrocodone prescriptions written. This model allows us to arrive at a conclusion of market share for Zohydro within the current hydrocodone prescription market and its various subsets (combination, single entity, immediate release, extended release, and variants). We further assign market share to ZGNX based on likely approvals of other competing single entity or extended release opioids formulated from hydrocodone and other products such as oxycodone, hydromorphone, morphine and other variants.
"For 2013, it appears Zohydro will likely be the only drug on market that is a single entity hydrocodone formulated drug with extended release qualities (if approved)."We expect that it is likely that the next entrant will not come onto the market until 2014 at the earliest.Therefore, we have assigned 100% market share with low penetration of the hydrocodone market in 2013. Our model then ramps the penetration of the drug quickly from 2014-2017 but adjusts Zohydro's overall share down to 35% by 2017, thereby reflecting the increasing competition likely to face the drug from competitors, offset somewhat by the growing hydrocodone market which is expected to reach $4.3 billion annually in the U.S. by 2017 at current growth rates.For context, we expect the overall opioid market to approach $20 billion by 2017," says Foley.
Foley further solidifies his argument by running his assumptions through a discounted cash flow model (see below).Some of his assumptions include Zogenix marketing Zohydro alone, a very high 20% discount rate to reflect the volatile nature of biotechnology and the expensive capital associated with the industry overall, a dilutive 25 million share offering and $50 million revolving line of bank credit post approval for marketing and sales, no successful ANDAs, competition from at least two competitors by 2014, single entity extended release hydrocodone only getting 6% of the total hydrocodone prescribing share (about 45% of what Oxycodone ER is today), royalties starting at 10% and declining over time due to the terms and conditions of the Cowen financing and the flat royalty payment to Alkermes (estimated), and relatively low terminal multiple assumptions.
"Based on this analysis we expect Zohydro to generate nearly $700 million in revenues in 2017 as the market and drug ramps.Taking into account our assumptions from above we arrive at a $12.50 valuation for Zogenix, four times the current share price," states Foley.
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Disclaimer: Statements herein may contain forward-looking statements and are subject to significant risks and uncertainties affecting results. The authors provide no assurance as to the subject company's plans or ability to effect proposed actions and cannot project capabilities, intent, resources, or experience. The subject companies haven't always approved the statements made in this report. This report is neither a solicitation to buy nor offer to sell securities and is for information purposes only and shouldn't be used as basis for any investment decisions. Kurt Divich, Dan Foley and Integrity Investor Relations, a division of Integrity Media Inc. isn't an investment advisor, analyst or licensed broker dealer and this report isn't investment advice. IMI has not been compensated by any company referenced herein for this editorial. Senior management of public companies are encouraged contact us directly to suggest coverage for an equity.