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Alexza Pharmaceuticals
Focus on Adasuve
Awaiting inflection in Adasuve volumes
Pharma & biotech
4 February 2015
Alexza's investment case continues to rest on the commercial prospects
for Adasuve, a rapid-inhalation treatment for acute agitation in adult
schizophrenia or bipolar disorder patients. Adasuve offers speed and
dosing reliability advantages in treating acute agitation. Although we have
Price
US$2.03
Market cap
US$39m
lengthened the sales ramp-up timeline given the 9m14 revenue pace, our
20% peak market share assumption remains unchanged. Given a slower
sales ramp up than expected, we expect Alexza will need to raise $20m in
capital in H215 to fund operations. Our new equity valuation of $3.67/share
(from $4.71 previously) does not reflect this funding gap or requirement.
Net debt ($m) at Q314
24.5
Shares in issue
19.4m
Free float
86%
Code
ALXA
Primary exchange
Revenue
($m)
PBT*
($m)
EPS*
($)
DPS
($)
P/E
(x)
Yield
(%)
12/12
4.1
(34.9)
(2.80)
0.0
N/A
N/A
12/13
47.8
(10.0)
(0.60)
0.0
N/A
N/A
12/14e
4.9
(45.6)
(2.56)
0.0
N/A
N/A
12/15e
18.8
(26.4)
(1.31)
0.0
N/A
N/A
Year end
NASDAQ
Secondary exchange
N/A
Share price performance
Note: *PBT and EPS are normalised, excluding intangible amortisation, exceptional items
and share-based payments.
Adasuve’s rapid time to effect a key advantage
Adasuve’s rapid time to therapeutic effect (10 minutes) vs intramuscular drugs (3090 minutes) or oral forms (>60 minutes) commonly used for acute agitation is a
substantial advantage given the risk of physical injury or property damage with
agitated patients in whom agitation is escalating. Conventional treatment options
are either slow to act or invasive, and are often dosed in combination.
9m14 sales signal a longer pathway to peak sales
9m14 product sales were $1.6m and largely consisted of initial inventory stocking
for its partners (Teva and Ferrer). Alexza projected no Q414 inventory shipments,
but expects resumption in Q115. Part of the unevenness in order flow results from
the administrative processes (potentially taking several months) needed for a
hospital to start using Adasuve. Hence, we have pushed back our sales ramp
forecasts, but still believe that 2020 global sales can approach $400m worldwide.
Alexza advancing AZ-002 and Staccato ropinirole
Alexza started a Phase IIa trial in January 2015 for AZ-002 (Staccato alprazolam) in
acute repetitive seizures in epilepsy patients. Staccato ropinirole is also in
preclinical stages for restless legs syndrome and Parkinson’s hypomobility.
Valuation: rNPV of $95.0m, upside from new products
We calculate an rNPV for Adasuve and AZ-002 at $95.0m (vs $97.7m previously),
as we have scaled back our near- to intermediate-term Adasuve penetration
forecasts. Including $22.6m in net debt (at Q414e) gives a $3.67 per share overall
valuation for the firm. Given a slower sales ramp, we expect Alexza to raise $20m
in capital in H215. The successful development of preclinical Staccato product
candidates (eg ropinirole or AZ-002) could add upside to our valuation.
%
1m
3m
12m
Abs
20.8
(3.3)
(58.6)
Rel (local)
21.3
(4.9)
(64.8)
52-week high/low
US$5.65
US$1.29
Business description
Alexza Pharmaceuticals is a US-based company
developing products for acute CNS disorders using
its proprietary Staccato rapid inhalation drug
delivery system. Lead product Adasuve is approved
in the US and EU for acute treatment of agitation in
patients with schizophrenia or bipolar I disorder.
Next events
Start AZ-002 Phase IIa study
Q115
Q414 results
March 2015
Analysts
Pooya Hemami
Christian Glennie
+1 646 653 7026
+44 (0)20 3077 5727
[email protected]
Edison profile page
Alexza Pharmaceuticals is a research client of Edison Investment Research Limited
Investment Summary: Eyeing Adasuve growth
Company description: Staccato inhalation delivery platform
Alexza Pharmaceuticals is a California-based pharmaceutical company developing products using
its proprietary Staccato inhalation platform, which provides rapid and efficient drug delivery. Its lead
product, Adasuve (Staccato loxapine), has been approved in the US and EU to treat agitation in
patients with schizophrenia or bipolar I disorder, and has been launched in 10 European markets
including Germany, Spain and France by commercial partner Ferrer, and was commercialised by
US partner Teva in Q114. We estimate peak global Adasuve revenue of $380m in 2020 and
sustained profitability from H117. The company is also developing AZ-002 (Staccato alprazolam) for
acute repetitive seizures (ARS), which started a Phase IIa study in January 2015. Staccato
ropinirole (AZ-008 and AZ-009) are in preclinical development for restless legs syndrome and for
Parkinson’s disease-related hypomobility.
Valuation: rNPV of $95m indicates upside potential
We calculate an rNPV for Adasuve and AZ-002 at $95.0m. Adjusting for $22.6m in net debt (at
Q414e) gives a $3.67 per share equity valuation for the firm. This represents clear upside to
Alexza’s $2.07 share price and EV of $62.8m, and reflects a 25% probability of success for AZ-002.
We apply a 12.5% cost of capital. Our assessment does not specifically value preclinical candidates
(such as ropinirole-based drugs) or the Staccato platform technology itself, which could be
extended into other active pharmaceutical ingredients and could provide additional value-creation
opportunities in acute treatment settings.
Sensitivities: Regulatory, IP and commercial execution
Alexza’s valuation is principally tied to Adasuve’s prospects. Pulmonary concerns in patients with
active airway disease (specifically asthma and COPD) in early clinical studies prompted regulators
to require risk management programmes (REMS) and post-marketing studies. Unfavourable study
data could lead to restrictions that could impair the drug’s penetration rate. We model Adasuve
having market exclusivity until 2022 (expiry date of key composition patents), but a five-year patent
term extension could be granted to strengthen the commercial window of the product. The
complexity of the Staccato device could also add barriers to would-be generic competitors once
patents expire. Alexza is also dependent on partners for the components used in Adasuve
manufacturing, and unforeseen supply interruptions could affect product availability. While 9m14
Adasuve product sales have been relatively modest ($1.6m), we believe that partners Teva and
Ferrer are committed to ensuring a strong commercialisation effort, and we expect utilisation to
grow as more healthcare facilities receive certification to commence dispensing product.
Financials: Further financing likely before reaching profitability
Alexza finished Q314 (30 September 2014) with $24.5m in net debt and has guided that its current
resources will fund its operations into Q415. While Teva is responsible for funding the required US
post-marketing studies and commercialisation-related obligations, we expect Alexza to engage in
R&D costs in the $10-15m/year range as it invests in AZ-002, ropinirole-based drugs (AZ-008 and
AZ-009) and other projects. The firm’s 9m14 burn rate was $36.9m, but we assume it will decrease
over the coming quarters as Adasuve-related revenues increase. We anticipate break-even
operating cash flows (ie the period when Adasuve-related revenue begins to consistently exceed
operating costs) will commence in H117. Our model assumes that Alexza will raise an additional
$20m in debt financing in H215.
Alexza Pharmaceuticals | 4 February 2015
2
Outlook: Awaiting upswing in Adasuve volumes
Alexza supports the commercial efforts of its licensing partners, Teva and Ferrer, as they market its
lead product, Adasuve, in their respective covered territories. Adasuve offers speed and dosing
reliability advantages in acute agitation settings vs conventional alternative drugs, was first
launched by Ferrer in Germany and Austria in July 2013 and introduced in the US by Teva in March
2014. Alexza’s investment case is largely derived from Adasuve’s prospects in acute markets, with
the potential for other Staccato-based products providing longer-term opportunities.
Rapid effect and dosing convenience comes with premium pricing
Adasuve (Staccato loxapine) provides rapid onset of anti-agitation effects while offering a reliable
and more patient-friendly mode of drug administration. Loxapine is an off-patent, first-generation
antipsychotic (FGA) drug whose mechanism of action involves Dopamine-2 and 5-HT2A receptor
antagonism. Adasuve was approved by both the US FDA (late 2012) and EMA (early 2013) for the
acute treatment of agitation in adults with schizophrenia or bipolar I disorder (BPI). Its long-term
sales uptake weighs on whether the drug’s benefits as a rapidly acting, non-invasive treatment
option will win significant favour with physicians and stakeholders, given its potential drawbacks
(risk management programme and premium price) versus oral or intramuscular (IM) drugs.
Staccato delivery provides rapid, non-invasive treatment
Alexza’s proprietary Staccato system vaporises an excipient-free drug on activation to form a
condensation aerosol that enables rapid drug delivery. More than 90% of the drug is inspired within
seconds, providing a high degree of drug delivery reliability. Peak plasma levels in the systemic
circulation is achieved within two minutes, compared to 20-60 minutes for most orally administered
1
anti-agitation drugs and 15 to 60 minutes for intramuscular (IM) anti-agitation drug formulations.
Pulmonary effects remain primary safety consideration vs alternatives
The FDA issued a complete response letter (CRL) in 2010 to Adasuve’s initial 2009 US new drug
application (NDA) citing concerns about possible pulmonary adverse effects (AEs) in patients with
lung disease. Alexza responded in its 2011 resubmission with a new safety data analysis and
proposed a risk mitigation strategy, leading to eventual approval. Spirometry studies in patients with
asthma or chronic obstructive pulmonary disease (COPD) showed that Adasuve was associated
with a reduction in FEV1 (forced expiratory volume) and increased airway-related adverse events
(eg bronchospasm, wheezing, etc) vs placebo. All respiratory AEs in the Adasuve arms were either
self-limiting or readily managed with an inhalable bronchodilator.
US REMS protocol could have contributed to slow initial uptake
The FDA’s approval carried a black box warning that Adasuve can cause bronchospasm, which can
potentially lead to respiratory distress or arrest. The FDA also required a Risk Evaluation and
Mitigation Strategies (REMS) programme to mitigate the potential for negative outcomes in the
event of Adasuve-induced bronchospasm. A core requirement of the US REMS programme is that
Adasuve can only be dispensed in healthcare facilities that have applied to enrol for Adasuve
REMS facility certification (outpatient use is not permitted). Sites applying for Adasuve REMS
facility certification must fulfil certain criteria, such as being equipped to provide onsite access to
advanced airway management procedures and bronchodilator medications.
1
Wilson MP, Pepper D, Currier GW, et al. West J Emerg Med. 2012 Feb;13 (1): 26-34; Draft document from
Alexza to PDAC (December 2011).
Alexza Pharmaceuticals | 4 February 2015
3
Alexza informed us that obtaining REMS certifications at US facilities has been occurring more
slowly than originally anticipated, and this likely contributed to slower than initially planned Adasuve
uptake in the US since the March 2014 launch. The timing required for healthcare facilities to obtain
REMS certification varies from site to site and depends on the timeliness by which Adasuve sales
representatives (ie from the US licensing partner Teva) or staff physicians can contact facility
administrators to encourage them to apply for Adasuve REMS certification. The physicians we have
spoken to indicated that most of the REMS components should not be significant deterrents to
physicians prescribing Adasuve once a facility has received REMS certification.
Based on our discussions with European physicians who have used Adasuve in practice since its
launch, there have been very few occurrences of pulmonary AEs in its deployment, all of which had
been self-limiting or readily resolved through the use of a bronchodilator.
Review of agitation and established treatment approaches
Agitation episodes occur in many people suffering from major psychiatric disorders and are often
treated in medical emergency room (MER) settings or emergency psychiatry (EP) facilities. The US
National Institute of Mental Health estimates that c 2.4m US adults have schizophrenia and c 5.7m
US adults have bipolar disorder. Approximately 1.7-1.8m emergency room visits in the US per year
2, 3
4
may involve agitated patients. Up to 8m adults in the EU have schizophrenia or bipolar disorder.
Agitated individuals generally exhibit restlessness, pacing and unpredictable behaviour and are at
risk of becoming aggressive and violent if not treated quickly and effectively. Non-pharmacologic
approaches (such as verbal de-escalation and reducing environmental stimulation) are first
5
attempted, but often these are unsuccessful and medications are required. Conventional
treatments include oral or intramuscular (IM) antipsychotic medications, such as FGAs like
haloperidol or second-generation antipsychotics (also referred to as atypical antipsychotics, or APs)
such as olanzapine (Zyprexa), ziprasidone (Geodon) and aripiprazole (Abilify). Haloperidol has a
long history of use, but can lead to arrhythmias and acute extrapyramidal side effects (EPS). APs
have a lower risk of EPS than FGAs. Benzodiazepines such as lorazepam have a sedating effect,
but may cause respiratory depression or hypotension.
IM formulations offer a more rapid onset of effect than oral drugs, but patients are often resistant to
IM injection, which presents added physical injury risks and can also provoke mental trauma to the
patient that can compromise patient-physician relationships and affect long-term treatment
compliance. Consequently, oral drugs have in recent years been the first drug class employed in
agitation scenarios. However, as oral drugs take 30 to 60 minutes to start exerting effects, agitated
patients still pose a risk of injury or property damage until a therapeutic effect is attained.
Adasuve provides improvements on PEC agitation scale
The Positive and Negative Syndrome Scale, Excited Component (PEC) scale is often used to
measure treatment efficacy. Each of Alexza’s Phase III pivotal studies showed statistically
significant (p<0.0001) improvements in PEC scores vs baseline compared to placebo at two hours
(the primary endpoint). In time to statistically significant treatment effect vs placebo, Adasuve
appears to outperform other products (Exhibit 1), as both pivotal studies showed statistically
significant differences vs placebo starting at 10 minutes.
2
Zeller SL, Rhoades RW. Clin Ther. 2010;32:403–425.
Sachs GS. J Clin Psychiatry. 2006;67 Suppl 10:5-12.
Wittchen HU et al. Eur. Neuropsychopharmacol. 2011:21, 655-679.
5
Wilson MP, Pepper D, Currier GW, et al. West J Emerg Med. 2012 Feb;13(1):26-34.
3
4
Alexza Pharmaceuticals | 4 February 2015
4
Exhibit 1: Comparison of pivotal trial data between Adasuve, IM Aripiprazole and IM Olanzapine
Drug and dosage
Agitation
indication
Adasuve (inhaled
loxapine), 10mg
Schizophrenia
Treatment arm/ Mean reduction in
placebo arm PEC at 120min vs
sizes
baseline
Bipolar I disorder
IM Olanzapine, 10mg Schizophrenia
Schizophrenia
Bipolar I disorder
IM Aripiprazole,
Schizophrenia
9.75mg
Schizophrenia
Bipolar I disorder
Comparator data
IM Haloperidol
Schizophrenia
Schizophrenia
Schizophrenia
Schizophrenia
IM Lorazepam
Bipolar I disorder
Bipolar I disorder
Time to first significant
Time to significant Study identifier
reduction in PEC score difference in responders
vs placebo (>40% PEC response) vs
placebo*
10min
10min
004-301
113/115
8.6
105/105
131/54
46/45
98/50
57/62
9.2
7.74
8.95
8.98
7.82
10min
15min
30min
30min
45min
10min
120min
120min
120min
60min
004-302
F1D-MC-HGHB
F1D-MC-HGHV
F1D-MC-HGHW
CN 138050
175/88
75/73
7.99
8.74
120min
90min
120min
90min
CN 138012
CN 138013
126/0
40/0
60/0
185/0
51/0
68/0
7.63
7.29
7.32
8.25
9.57
6.08
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
F1D-MC-HGHB
F1D-MC-HGHV
CN 138050
CN 138012
F1D-MC-HGHW
CN 138013
Sources: Draft document from Alexza to PDAC (December 2011), Edison Investment Research. Note: *In the IM Aripiprazole
responder analysis in patients with schizophrenia, the only assessment times reported in available data were at 60 and 120 minutes. In
patients with bipolar disorder, the IM Aripiprazole/placebo comparison failed to achieve statistical significance at 30, 45, or 60 minutes,
but was significant at 90 minutes. In the IM Olanzapine responder analysis in patients with schizophrenia, the only reported
assessment vs placebo in available data was at 120 minutes. In patients with bipolar disorder, the only pairwise comparison reported in
available data was at 120 minutes.
Both Adasuve studies also showed significant improvements in treatment response (defined as a
40% decrease from baseline in the PEC score) starting at 10 minutes, again a quicker response
than the measured paired differences in IM aripiprazole and olanzapine. Altogether, given its rapid
response in a non-invasive formulation, Adasuve offers a unique agitation treatment option that
does not require physicians to trade off either speed of effect or non-coercive dosing.
Exhibit 2: Characteristics of Adasuve vs conventional agitation therapeutic options
Type
Typical antipsychotic via
novel inhalation delivery
Example
Adasuve
(Staccato
loxapine)
Oral benzodiazepines
Lorazepam
Benefits
Quicker onset of action vs IM;
patient-friendly administration
method; lower risk of doseavoidance
Well-established history of use
Oral typical antipsychotic
Haloperidol
Well-established history of use
Oral atypical antipsychotic
Risperidone,
Olanzapine
Intramuscular (IM) atypical Ziprasidone,
antipsychotics
Olanzapine,
Aripiprazole
IM typical antipsychotic
Haloperidol
Reduced AE profile and
Lower risk of sedation vs typicals
Faster onset of action vs orals
Reduced AE profile and lower risk
of sedation vs typicals
Faster onset of action vs orals
Limitations
Contraindicated in patients with pulmonary
disease (REMS); higher cost
Slower onset of action vs IM drugs
Addictive
Oversedation
Slower onset of action vs IM drugs
Greater risk of adverse events (AE) vs atypicals
Slower onset of action vs IM drugs
Invasive and forcible administration
Needle injury risk
Invasive and forcible administration
Needle injury risk
Oversedation
Greater risk of AE vs atypicals
Source: Adapted from Presentation of Leslie Zun, MD, at Alexza Investor Day on 6 May 2014, Edison
Investment Research
Commercialisation efforts underway through Teva and Ferrer
Ferrer entered an agreement with Alexza in 2011 to commercialise Adasuve in Europe, Latin
America, Russia and CIS. In May 2013, Teva paid $40m upfront to enter a partnership agreement
Alexza Pharmaceuticals | 4 February 2015
5
with Alexza to commercialise the drug in the US market, also providing Alexza with escalating
royalties, which we estimate peak in the upper teens and with up to $195m in milestone payments.
Teva launched Adasuve in March 2014 and while Teva has not provided significant granularity on
the end-user unit sales and reach of Adasuve (in terms of how many US facilities have Adasuve
REMS certification or how many physicians have dispensed it), Alexza has disclosed its quarterly
unit shipments to Teva. Much of this reflects initial product inventory stocking, and Alexza indicated
that it does not expect to ship any Adasuve inventory during Q414, although it expects shipments to
resume in 2015. Our model assumes over 509,000 Adasuve unit shipments in 2015.
Exhibit 3: Adasuve units shipped since initial launch
Units sold
Ferrer
Teva
Total units shipped
Q213
13,370
0
13,370
Q313
14,405
0
14,405
Q413
11,863
9,307
21,170
Q114
9,433
18,788
28,221
Q214
4,797
23,031
27,828
Q314
6,979
32,278
39,257
Source: Company reports
Ferrer’s EU launch strategy has been to first target countries with free (unrestricted) pricing and to
establish a relatively high treatment price in these territories (such as Germany and Austria, where
initial EU launches took place in H213), which can then be used to set the barometer for
subsequent launches in the EU countries that use reference pricing. To date, Adasuve has been
launched in 10 European countries (Germany, Austria, Spain, France, Romania, Poland, Sweden,
Norway, Denmark and Finland) and Ferrer has sustained a price in excess of €70 per dose in all
these countries. The product has also been approved in Guatemala, Chile, Ecuador, Paraguay, and
Costa Rica, and we anticipate that introductions in larger Latin American markets (eg Brazil or
Mexico) could occur within two years. Ferrer expects to launch the product in other European
countries in 2015, potentially including large markets such as Italy and the UK, although the
6
challenges in obtaining NICE reimbursement could limit its UK market potential.
Adasuve is now available in over 260 EU hospitals and Ferrer intends to expand the drug’s sales
reach. Ferrer signalled its confidence in Adasuve through its 27 October 2014 purchase of 2m
shares of Alexza at $4.00 per share (a 76% premium to the prior day's close), which also included a
consideration for the elimination of a significant proportion of the c $45m in outstanding potential
sales milestones payments to which Alexza could have otherwise been entitled in the future.
Exhibit 4: Summary of licensing terms for Adasuve partnerships with Teva and Ferrer
Partner
Territories covered
Teva
Pharmaceuticals
US
Grupo Ferrer
Europe, Latin America,
Russia and Commonwealth of
Independent States countries
Upfront Recurring revenue
payment terms
$40m Tiered royalties, in addition to
manufacturing revenues (at
least equal to Alexza's COGS)
$10m Per-unit transfer
price
Potential milestones
Upto $195m based on net sales
targets and results of post-approval studies.
None has been triggered to date.
Originally upto $51m based on commercial
launch in nine pre-specified countries (already
received $3m for MAA approval, and $2.25m
for launches in Germany and Spain) and
cumulative sales milestones; a large
percentage of potential outstanding
milestones eliminated in October 2014 as part
of Ferrer purchase of $8m in Alexza equity.
Source: Company documents
Premium pricing vs established agitation drugs a potential disincentive
Adasuve is priced at $145/dose in the US and, with the exception of IM olanzapine, most IM or oral
doses discussed above have US prices below $10/dose. The per-dose cost differential vs Adasuve
poses an initial barrier towards the drug’s penetration and acceptance by hospital and pharmacy
administrators, but Alexza’s commercial partners are tasked with demonstrating to these
6
NICE reimbursement generally requires improvements in quality-adjusted life years, which is difficult to
illustrate with an acute agitation drug.
Alexza Pharmaceuticals | 4 February 2015
6
stakeholders that the indirect cost savings of this drug (notably lower likelihood for property damage
or patient/staff injury, or possibly quicker patient discharges in some cases) versus slower-onset or
IM drugs as a meaningful treatment advantage.
Adasuve financial model
We assume two million US cases of agitation present to hospital or psychiatric ER units per year,
and that 75% of these represent the potential Adasuve treatment market, as we forecast 10% are
too uncooperative to use Adasuve and that 15% will have a contraindicating lung condition.
We estimate that on average, a presenting patient would receive four anti-agitation treatment doses
during their stay at a facility (some patients can be discharged in under 24 hours and only receive
one or two doses, while others may be admitted for a week or longer); this brings the target US
market at c 6m doses per year. We believe Adasuve’s rapid speed to effect make it ideal for initial
presentations of agitation (in BPI and schizophrenia), but the majority of subsequent doses that
may be required in inpatient settings will often be adequately managed by lower-cost oral drugs.
We model Teva royalties starting at 13% and peaking at 18% of net sales. We assume that up to
$50m in milestones (out of $195m in eligible total) will be triggered before 2021 (between $5-10m
per year from 2015 to 2020). We model that Alexza’s long-term transfer price from Ferrer is c 20%
of Ferrer’s net selling price (NSP). We model that generic erosion will start in 2023.
As Q314 product sales revenue was lower than we expected ($0.09m actual vs $0.45m expected)
and sales through 9m14 were slower than we previously assumed, we are reducing our near- to
intermediate-term growth forecasts, while leaving our peak sales assumptions mostly unchanged.
We believe Adasuve can still obtain significant penetration in agitation settings.
Exhibit 5: Changes in forecasts for Adasuve sales
US$000
US Market
Estimated addressable market (doses/year)
Market share (previous)
Market share (new)
Net Adasuve sales (US$000) (previous)
Net Adasuve sales (US$000) (new)
EU market
Estimated addressable market (doses/year)
Market share (previous)
Market share (new)
Net Adasuve sales (US$000) (previous)
Net Adasuve sales (US$000) (new)
New Latin America Adasuve sales (US$000)
WW Adasuve revenue (previous)
WW Adasuve revenue (new)
2015e
2016e
2017e
2018e
2019e
2020e
6,115
6.3%
4.2%
55,325
36,924
6,173
9.7%
6.9%
90,642
64,244
6,232
14.2%
10.5%
141,157
104,007
6,292
18.3%
14.5%
192,907
152,236
6,352
19.9%
18.2%
222,536
203,787
6,412
19.9%
19.8%
235,891
234,422
9,631
3.8%
2.5%
32,260
21,539
884
88,909
59,347
9,669
5.8%
4.1%
57,183
40,529
1,658
150,164
106,431
9,708
8.6%
6.3%
85,918
63,307
2,579
230,574
169,893
9,747
11.0%
8.7%
116,785
92,160
3,739
314,431
248,135
9,786
12.0%
11.0%
133,996
122,697
4,958
361,948
331,442
9,825
12.0%
11.9%
141,259
140,378
5,651
382,836
380,450
Source: Edison Investment Research
Staccato targeting new markets
Alexza is developing the Staccato delivery technology for other therapeutic areas requiring rapid
and consistent drug delivery and ease of administration.
AZ-002 under development for ARS
Alexza is developing AZ-002 (Staccato alprazolam) for ARS, or clusters of seizures occurring over a
short time period. Epilepsy affects 2.3m patients in the US (source: US Centers for Disease Control
and Prevention) and up to 180,000 can suffer from unpredictable breakthrough seizures despite
taking anti-seizure medications (and may have between two and 12 ARS ‘cluster attacks’ per year).
Alexza Pharmaceuticals | 4 February 2015
7
Alprazolam is a generic benzodiazepine and AZ-002 Phase I trials showed rapid drug
pharmacokinetics (PK) with Tmax of two minutes. The only drugs approved for ARS are IV and rectal
gel benzodiazepines (such as Valeant’s Diastat, or diazepam rectal gel [DRG]).
DRG has a quick time to therapeutic onset of about 15 minutes, although its Tmax of 1.5 hours
suggests that a benzodiazepine product with more rapid PK could be more effective in preventing
further seizures (the therapeutic rationale is that prolonged or recurring seizures persisting for >30
minutes can lead to injury). The proposed role for AZ-002 would be through its application (in either
inpatient or outpatient settings) between seizure episodes on the onset of an ARS attack to prevent
further seizure recurrences during the cluster attack.
In January 2015, Alexza started patient dosing in Q115 in a small (10-15) patient Phase IIa POC
intermittent photostimulation study to determine the electroencephalographic effects of a single
dose of AZ-002 at different dose strengths. Patients will be exposed to a photostimulus that can
provoke a subcortical but harmless seizure, and be dosed with differing single doses of AZ-002 to
determine the doses that can halt this response without provoking excess sedation. Results are
expected in Q215 and Alexza plans to use the dose response from this study to determine optimal
dose ranges for a Phase IIb trial planned in H215. The Phase IIb trial would provide the drug (or
placebo) to patients in a dedicated epilepsy monitoring unit (EMU) and measure the number of
seizures occurring over a 12-hour period vs placebo. If results are positive, Alexza may advance
the product to a pivotal community-based study. The firm is also seeking orphan drug status.
Potential competitors also looking at rapid-delivery (RD) benzodiazepines for ARS
Acorda Therapeutics is developing a 20mg diazepam nasal spray (DNS). In May 2014 Acorda’s US
regulatory application was subject to a complete response letter (CRL) from the FDA requesting
further clinical work and it is reviewing its next steps. Upsher-Smith Laboratories is developing an
intranasal midazolam spray for ARS, USL261, being studied in a 155-patient, double-blind Phase III
study (ARTEMIS1, NCT01390220), with data expected in H115 and potential launch in 2016.
USL261 has shown a Tmax of 10-15 minutes in PK studies and research has showed that
7
8
intranasal midazolam compares favourably with DRG and IV diazepam. Neurelis is developing
NRL-1, an intranasal diazepam formulation, which may start ‘pivotal’ PK studies in 2015 and will
9
take two years to complete before filing a 505(b)(2) NDA submission. Buccal midazolam
formulations have been used off-label for ARS (eg Buccolam, ViroPharma).
AZ-002 market opportunity
Before the introduction of generics in 2010, Diastat had peak US sales of ~$100m. Diastat sells for
~$300 per administration vs ~$160 for generic DRG and hence we estimate that pricing for the
initial inhalable benzodiazepine will lie somewhere in between. Given the inconvenience associated
with DRG’s mode of administration, more convenient benzodiazepine dosage forms could increase
the size of the market, as there should be less reluctance for product use. We assume that in an
ideal scenario, Alexza could start a pivotal study in H216 (expected cost of $10-15m), potentially
leading to a 2018 launch. As the market may become more crowded with other RD forms of
benzodiazepines, we assume that AZ-002’s market share will not exceed 20% (we define the US
market as 150,000 ARS susceptible patients experiencing an average of five cluster seizures per
year), although AZ-002 may differentiate itself by potentially providing a more rapid therapeutic
response (ie as its Tmax is believed to be shorter than USL261 and Acorda’s candidates).
7
Holsti M, et al. Arch Pediatr Adolesc Med. 2010 Aug; 164 (8): 747-53.
Lahat E, et al. BMJ 2000;321:83.
A 505(b)(2) application is a fast-track development/approval process as existing efficacy and safety data from
a listed product (in this case, DRG) can be referenced in the filing for approval.
8
9
Alexza Pharmaceuticals | 4 February 2015
8
Staccato ropinirole being advanced in preclinical studies
AZ-008 and AZ-009 are preclinical Staccato platform candidates that employ ropinirole (a
genericised dopamine agonist). AZ-008 is being developed for the acute treatment of restless legs
syndrome (RLS) and AZ-009 is advanced for hypomobility, or freezing, during “off periods” in
Parkinson’s disease (PD) patients. The rapid drug delivery approach underpins the value addition
proposal for Staccato ropinirole, potentially offering quicker symptomatic relief than orally
administered alternatives. RLS affects 2-3% of the adult US population and is characterised by
restlessness in the legs and uncomfortable sensations that can disturb sleep. Alexza expects AZ008 and AZ-009 to use the same preclinical and toxicology programme, investigational new drug
(IND) submission and initial Phase I clinical trial. Beginning with planned Phase II trials, Alexza
expects to separate the two product candidates into distinct development programmes for their
differing patient populations. Alexza has guided that Phase I studies could potentially begin in H116.
Valuation
We value Alexza using a risk-adjusted net present value (rNPV) model, using a 12.5% cost of
capital. Our valuation includes our revenue expectations for Adasuve and for AZ-002, but we only
assign a 25% probability of success for AZ-002 as it has not yet shown POC efficacy in ARS. Given
their early stages of development, we are not yet including AZ-008 or AZ-009 in our valuation.
Exhibit 6: Alexza Pharmaceuticals rNPV assumptions
Product
Indication
rNPV ($m) rNPV/share
($)
Adasuve revenue and
Agitation
milestones
AZ-002 revenue and
Acute repetitive
milestones
seizures
COGS and Adasuve contingency costs
R&D Expenses
SG&A expenses
Net capex, NWC & taxes
Total pipeline rNPV
Net debt (Q414e)
Total equity value
FD shares outstanding
(m)
Probability
of success
Launch
year
301.7
15.28
100%
2013
13.2
0.67
25%
2018
(157.0)
(12.3)
(40.6)
(10.0)
95.0
22.6
72.4
19.8
(7.95)
(0.62)
(2.05)
(0.51)
4.81
1.14
3.67
Est. peak
Current
US market WW market
share value ($m)
20%
1,100
20%
Est. max
US royalty
rate
20%
Est. peak
WW sales
($m)
418 in 2022
25%
86 in 2023
470
Source: Edison Investment Research
Our $95.0m rNPV (vs $97.7m previously) calculation represents upside to Alexza’s current EV of
10
c $75.4m, and equates to $3.67 per share fully diluted after adjusting for $22.6m net debt
(Q414e). While we maintain our 20% peak market share assumption for Adasuve, post-launch
sales to date had been below our previous forecasts and there is a risk that peak sales could fall
below our projections. Below we provide the adjustments to our rNPV and peak 2022 sales
assumptions that could result if lower peak market share forecasts were applied.
Exhibit 7: Alexza Pharmaceuticals rNPV sensitivity to peak market share assumptions
Peak market share
20% (base case)
15%
10%
Peak 2022 WW sales ($m)
418
313
209
Alexza rNPV
95.0
56.7
17.7
Source: Edison Investment Research
10
This includes potential dilution from the warrants attached to the March 2014 $45m financing and Teva’s
option to convert amounts loaned to Alexza common shares at $4.4833 per share.
Alexza Pharmaceuticals | 4 February 2015
9
Our assessment does not specifically value the Staccato platform technology, which we believe
could be extended into other active pharmaceutical ingredients (API) and presents additional valuecreation opportunities in acute treatment settings.
Sensitivities
Alexza’s valuation is principally tied to the revenue prospects of Adasuve. Factors affecting
Adasuve sales and Alexza’s operating performance and returns are shown below.
Regulatory risk. If data from the post-marketing studies required as part of Adasuve’s US and EU
approvals reveal further pulmonary safety concerns, restrictions on its commercialisation could
arise (or a more burdensome REMS). Conversely, if favourable safety trends emerge, the REMS
could be lessened, potentially furthering the sales reach.
Intellectual property. Alexza has an extensive intellectual property (IP) position, with over 185 US
and international patents. The Staccato delivery technology is protected by composition patents valid
through 2022 covering processes for the delivery of drug aerosols (with the potential for an additional
patent term extension of up to five years).
Manufacturing and supplier risk. While Alexza completes Adasuve manufacturing at its Mountain
View, California facility, it relies on single-source suppliers for the product’s components, including
the heat packages (supplied via an exclusive supply relationship with Autoliv ASP through at least
2018). Any supply interruption would limit the firm’s ability to manufacture Adasuve.
Reliance on commercial partners and market share penetration of Adasuve. Adasuve’s
success hinges on the efforts and capabilities of Alexza’s marketing partners, Teva and Ferrer, in
marketing and promoting the product.
Financing risk. We forecast Alexza will continue to run operating losses through H117 as its R&D
and operating expenses exceed the royalties and revenues generated from Adasuve commercial
sales until the product’s penetration reaches a level (c $150m in annual sales) to offset these costs.
We believe Alexza will require additional capital to support its operations until Adasuve sales reach
a sufficient level to sustain its operations without external funding; we expect the firm to raise $20m
in capital in H215. However, if sales ramp up more slowly than expected or if R&D spending or
post-marketing commitments exceed our expectations, the firm may need to raise further capital.
Off-label usage or label extension to other indications. Longer term, Adasuve’s label could
potentially be extended to allow the drug to reach the much broader outpatient market (eg
ambulances or even patient-initiated agitation therapy), which would require a relaxing of the
current REMS and likely additional clinical trials. This scenario could present upside to our financial
forecasts.
Financials
Alexza reported cash and equivalents of $39.0m on 30 September 2014 (including $4.2m of
restricted cash) and total debt of $63.6m. Hence, we determine Q314 net debt at $24.5m and we
estimate Alexza’s weighted average cost of debt at 9.5%. Given the $8m equity purchase by Ferrer
in Q414, we estimate Q414e net debt of $22.6m.
We expect Alexza’s R&D costs to remain in the $10-15m/year range as it spends on AZ-002 and
other pipeline projects. Alexza must also fund the post-marketing Adasuve commitments for the EU
(which we assume will cost the company $3-5m in 2015). Alexza guides that its current resources
can fund operations into Q415. The firm’s 9m14 burn rate was $36.9m. However, as Adasuverelated revenues increase, we assume the burn rate will decrease over the coming quarters, and
Alexza Pharmaceuticals | 4 February 2015
10
that break-even operating cash flows (ie the period when Adasuve-related revenue begins to
consistently exceed operating costs) will commence in H117. Our model assumes that Alexza will
raise an additional $20m in debt financing in H215.
Following its purchase of Symphony Allegro in 2009, Alexza is obligated to make contingent cash
payments to the former Allegro shareholders relating to the licensing or royalty commercial revenue
derived from Adasuve and AZ-002; Allegro is entitled to 25% of the initial $100m of covered
revenues received by Alexza (c 5% remains outstanding as of Q314) and to 10% of all amounts
thereafter. Our normalised EPS estimates include the payments of these obligations to Allegro.
Exhibit 8: Financial summary
2012
US GAAP
2013
US GAAP
2014e
US GAAP
2015e
US GAAP
2016e
US GAAP
4,070
0
4,070
(6,757)
(21,849)
(24,536)
(28,872)
0
6,900
(5,000)
(26,972)
(1,006)
(34,878)
(27,978)
0
(34,878)
(27,978)
47,839
(11,209)
36,630
(12,492)
(19,082)
5,056
1,770
0
(29,587)
(10,326)
(38,143)
(1,472)
(10,028)
(39,615)
0
(10,028)
(39,615)
4,936
(14,979)
(10,043)
(11,890)
(13,703)
(35,636)
(38,903)
0
5,622
(276)
(33,557)
(6,455)
(45,634)
(40,012)
0
(45,634)
(40,012)
18,796
(17,057)
1,739
(6,303)
(11,858)
(16,422)
(19,166)
0
0
(1,971)
(21,137)
(5,310)
(26,447)
(26,447)
0
(26,447)
(26,447)
27,119
(18,020)
9,098
(6,476)
(10,353)
(7,731)
(10,118)
0
0
(2,230)
(12,348)
(7,569)
(19,917)
(19,917)
0
(19,917)
(19,917)
12.5
(2.80)
(2.80)
(2.24)
0.0
16.7
(0.60)
(0.60)
(2.38)
0.0
17.9
(2.56)
(2.51)
(2.24)
0.0
20.2
(1.31)
(1.29)
(1.31)
0.0
21.3
(0.93)
(0.92)
(0.93)
0.0
BALANCE SHEET
Fixed Assets
Intangible Assets
Tangible Assets
Investments (new ABCP Notes)
Current Assets
Short-term investments
Debtors
Cash
Other
Current Liabilities
Creditors
Short term borrowings
Long Term Liabilities
Long term borrowings*
Other long term liabilities
Net Assets
16,933
0
16,933
0
23,618
5,051
0
17,715
852
(18,718)
(12,257)
(6,461)
(19,260)
0
(19,260)
2,573
16,159
0
16,159
0
30,913
8,578
0
17,306
5,029
(14,898)
(14,118)
(780)
(56,149)
(10,859)
(45,290)
(23,975)
21,898
0
17,738
4,160
41,962
15,261
0
21,576
5,125
(11,042)
(10,841)
(201)
(103,643)
(63,378)
(40,265)
(50,826)
19,954
0
15,794
4,160
37,805
261
0
30,575
6,968
(9,149)
(8,948)
(201)
(123,643)
(83,378)
(40,265)
(75,033)
18,408
0
14,248
4,160
22,791
0
0
15,364
7,427
(10,221)
(10,020)
(201)
(123,643)
(83,378)
(40,265)
(92,665)
CASH FLOW
Operating Cash Flow
Net Interest
Tax
Capex
Acquisitions/disposals
Financing
Other
Net Cash Flow
Opening net debt/(cash)
HP finance leases initiated
Other
Closing net debt/(cash)
(22,235)
(1,006)
0
(27)
0
35,242
0
11,974
(4,623)
0
(292)
(16,305)
(9,453)
(1,472)
0
(1,768)
0
6,583
0
(6,110)
(16,305)
0
4,050
(14,245)
(34,042)
(6,455)
0
(2,742)
0
8,214
0
(35,025)
(14,245)
0
(1,802)
22,582
(19,890)
(5,310)
0
(801)
0
0
0
(26,001)
22,582
0
0
48,583
(6,802)
(7,569)
0
(841)
0
0
0
(15,211)
48,583
0
(0)
63,794
31-December
PROFIT & LOSS
Revenue
Cost of Sales
Gross Profit
General & Administrative
Research & Development
EBITDA
Operating Profit (before except.and Allegro payouts)
Intangible Amortisation
Exceptionals
Other including payouts to Symphony Allegro
Operating Profit
Net Interest
Profit Before Tax (norm)
Profit Before Tax (FRS 3)
Tax
Profit After Tax (norm)
Profit After Tax (FRS 3)
Average Number of Shares Outstanding (m)
EPS - normalised (US$)
EPS - normalised and fully diluted (US$)
EPS - (IFRS) (US$)
Dividend per share ($)
US$000
Source: Alexza accounts, Edison Investment Research. Note: *We assume $20m debt financing in 2015.
Alexza Pharmaceuticals | 4 February 2015
11
Contact details
Revenue by geography
2091 Stierlin Court Mountain View,
CA 94043 US
+1- 650-944-7000
www.alexza.com
N/A
CAGR metrics
Profitability metrics
EPS 11-15e
EPS 13-15e
EBITDA 11-15e
EBITDA 13-15e
Sales 11-15e
Sales 13-15e
N/A
N/A
N/A
N/A
N/A
N/A
ROCE 14
Avg ROCE 11-15e
ROE 14e
Gross margin 14e
Operating margin 14e
Gr mgn / Op mgn 14e
Balance sheet metrics
202.3%
N/A
89.8%
N/A
N/A
N/A
Gearing 14e
Interest cover 14e
CA/CL 14e
Stock days 14e
Debtor days 14e
Creditor days 14e
Sensitivities evaluation
N/A
N/A
3.8
1128.5
N/A
801.7
Litigation/regulatory
Pensions
Currency
Stock overhang
Interest rates
Oil/commodity prices






Management team
Chief Executive Officer: Thomas King
Chief Financial Officer: Mark Oki
Thomas King has been CEO since June 2003. From September 2002 to April
2003, he served as chief executive officer of Cognetix, a biopharmaceutical
development company. From January 1994 to February 2001, he held various
senior executive positions, at Anesta, a publicly traded pharmaceutical company,
including CEO from January 1997 to October 2000, and was a member of the
board of directors until it was acquired by Cephalon.
Mark Oki has been CFO since July 2012, principal accounting officer since May
2010 and principal financial officer since December 2011. He was VP, finance
and controller from February 2010 to July 2012 and controller from April 2006 to
February 2010. From June 2001 to April 2006, he was controller of
Pharmacyclics. From 1998 to 2001, Mr Oki held several positions, including
assistant controller at Incyte. From 1992 to 1997, he held several positions at
Deloitte & Touche.
Chief Scientific Officer: James Cassella, PhD
Chief Operating Officer and EVP, Operations: Robert Lippe
James Cassella has been chief scientific officer and EVP of R&D since July
2012, having previously been SVP, R&D from June 2004 to July 2012. From April
1989 to April 2004, he held various management positions at Neurogen, a
publicly traded biotechnology company, including SVP, clinical research and
development from January 2003 to June 2004. Before Neurogen, Dr Cassella
was assistant professor of neuroscience at Oberlin College.
Robert Lippe has been EVP, Operations and COO since February 2014.
Previously, he served as the head of Global Operations & Operational
Excellence at Ironwood Pharmaceuticals.since 2011. He worked for Genentech
from 2002 to 2011, holding several roles including head of manufacturing, as well
as positions in strategic operations, drug substance and drug product
manufacturing. Before Genentech, Mr. Lippe spent 10 years at Lawrence
Livermore National Laboratory and six years as an officer in the US Coast
Guard.
Principal shareholders
(%)
Grupo Ferrer Internacional
Lansdowne Partners (Austria)
Morgan Stanley
Swedbank Robur Fonder
Credit Suisse
CAM Group
Vangard Group
11.55
8.73
4.49
4.39
4.07
3.69
3.23
Companies named in this report
Teva, Grupo Ferrer, Acorda Therapeutics, Upsher-Smith Laboratories, Neurelis
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Frankfurt +49 (0)69 78 8076 960
Schumannstrasse
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Alexza Pharmaceuticals
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Germany
London +44 (0)20 3077 5700
High Holborn
| 280
4 February
2015
London, WC1V 7EE
United Kingdom
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12