Alexza’s Delicate Balance

AZ-004 (Staccato loxapine) is a pre-NDA candidate for the treatment of acute agitation in patients with schizophrenia and/or bipolar disorder.  Management at Alexza Pharmaceuticals (ALXA - Analyst Report) is focused on completing the necessary non-pivotal safety and supportive work, as well as the chemical and manufacturing scale-up, on AZ-004 in preparation of the planned NDA [new drug application] filing in early 2010.

Besides the preparation that is being done for the AZ-004 NDA, management is focusing on partnering opportunities for the drug. There are currently no real effective treatment options for patients with schizophrenia or bipolar disorder with acute agitation. In most instances, anti-psychotic drugs are used with varying degrees of success.

Care-givers are looking for three key attributes in a treatment options:  speed of onset, predictability of response and convenience and non-invasiveness of delivery. Injectable drugs provide rapid onset and predictability, but the invasiveness of an intramuscular injection during an acute attack only adds to the agitated state of the patients. Oral drugs are less invasive, but do not provide rapid onset delivery.

AZ-004 looks to have all three desirable traits. Plus, the phase III data looks very good. We expect that signing a commercialization partner will get done in the next few months. This is a rather large and under-served market, but it is a market where the marketing partner will need to build and grow the business from the ground up. Thus, finding the right partner is extremely important for Alexza.
 
The company exited the second quarter with $26.0 million in cash. Based on our financial model, this is enough cash to fund operations into the first quarter of 2010. Thus, management is now working through the delicate balance of keeping burn low while keeping AZ-004 moving forward.

To raise cash in the next few months management can sign a commercialization partner for AZ-004.  However, Alexza wants to secure the best possible terms for shareholders, so management may look to raise cash prior to finalizing a deal so that the company can negotiate from a position of strength. Unfortunately, raising cash will probably mean issuing shares, and management is already planning on issuing 10 million shares and 5 million warrants to Symphony Allegro in late August 2009 to reacquire the full rights to AZ-004, AZ-104, and AZ-002. Therefore, dilution is a major concern over the next few quarters.

Nevertheless, we are very pleased to see Alexza buy-out Symphony Allegro because it removes a significant impediment to partnering and allows management to regain full control to the pipeline. Migraine headache drug AZ-104 is currently in a phase IIb program with data expected later in the third quarter 2009.

We are big fans of the Staccato platform. The delivery system fits well with key products under development, including AZ-004 for acute agitation, AZ-001 and AZ-104 for migraine headaches, and AZ-007 for insomnia. We expect the NDA filing on AZ-004 during the first quarter of 2010.

In the meantime, we are waiting for a partnership on the drug and/or an improvement in the financial position before we get aggressive in recommending the name. At this point, we believe investors can be patient and establish a position on pull-backs. Our price target is $3 per share.

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