Zogenix: Market Reaction To Fintepla's Approval Offers A Gift To Investors

With the highly volatile markets fueled by rising algorithmic and day trading, it is increasingly common to see wide swings in stocks, particularly in the biotech sector. Therefore, one must be prepared to have the courage of one’s convictions and accumulate fundamentally strong stocks on dips. Many times, that is the way real money can be made in the sector. This was the case on Friday with Zogenix (NASDAQ:ZGNX) shares, which traded down significantly on FDA approval of the company’s lead product Fintepla®, a treatment for the rare and severe epilepsy condition Dravet Syndrome, “DS”. We believe this negative reaction was an aberration, and that once the dust settles and Fintepla is commercialized, investors will buy this undervalued stock, which could drive shares back to at least the $52 level where ZGNX began the year. We encourage readers to view our initial article, especially now that approval has been granted and the risk profile (and the stock price) of ZGNX is much lower. In this article, we provide some additional insights into the investment thesis, as the company gears up for commercial launch of Fintepla. The negative reaction in ZGNX shares is an opportunity for investors to accumulate the stock, particularly with the recent seminal event of Fintepla approval going in favor of the company.

Black box warning expected by knowledgeable investors and not an issue. Throughout the trading day on Friday, there were comments and articles citing Fintepla’s black box warning in its FDA-approved label. Typically, these warnings can limit the market for products, but in some cases, like Fintepla, a boxed warning arises from a legacy issue. Note that Fintepla’s active ingredient is fenfluramine, one of the drugs associated with the diet drug, “fen-phen“, which was withdrawn from the market in the late 1990s. Importantly, the Phase 3 clinical studies for Fintepla conducted by Zogenix had clean safety data, with no valvular heart disease reported in all patients taking the drug. Additionally, real-world use in Belgium also contains no reports of cardiovascular issues, with some patients on the drug for 3 decades. Parents will do everything possible to stop their young children from experiencing the frequent seizures associated with DS, and with the strong Phase 3 clinical results backing Fintepla, the black box warning will not be a deterrent.

We point out that Jazz Pharmaceuticals’ (JAZZ) treatment for narcolepsy, Xyrem®, also has a black box warning and risk management “REMS” program for legacy reasons, as the active ingredient in this drug is the compound, sodium oxybate, known as the “date rape” drug. Despite its black box warning, Xyrem is a blockbuster orphan drug product, achieving 2019 sales of $1.6 billion. The key here is that drugs with this kind of history used in the proper population, particularly in an orphan drug setting, can grow to large franchises despite a black box on the label. In fact, the lesson learned is that the impact to patients with the orphan disease is so strong, that the FDA is willing to approve the drug despite the compound’s history. Further, a REMS program that appears to initially limit prescribing can actually turn into a proprietary tool that locks in doctors and patients, and makes it more difficult for generic drug competition to enter the market. Celgene’s Thalomid (thalidomide which caused birth defects in the 1960s) is another example of a blockbuster drug with a black box warning for similar reasons.

REMS program actually more favorable than the Phase 3 protocol. Upon approval, there was also some discussion about Fintepla’s REMS program. This program requires patients to undergo an echocardiogram at baseline upon treatment initiation and every six months thereafter. In our view, this was better than expected, as echocardiograms were conducted every 3 months in Fintepla’s Phase 3 program.

Fintepla should launch strong. Many times, “short the launch” can be a theme in the biopharma sector. However, like many orphan drugs, Fintepla already has a group of ready customers. Zogenix has strong affiliations with most of the major epilepsy treatment centers, DS patients and their advocacy groups, and has been treating patients in clinical trials and open label extension studies as well as its expanded access program, “EAP”. The company notes that pre-commercialization, approximately 500 patients are being treated with Fintepla, out of the 6,000 to 8,000 DS patients that it will initially target in the U.S. Most of the pre-commercial patients are expected to immediately convert to paying customers upon Fintepla’s launch, and those without health plan coverage will receive the drug directly from the company at a much-reduced cost or no cost at all. Notably, GW Pharma (NASDAQ:GWPH) estimates that there are 10,000 patients suffering from DS in the US, and an additional 10,000 patients in the EU. Pricing per patient for Fintepla is expected to average $96,000 annually, which is higher than GW Pharma’s Epidiolex price of ~$32,500 annually because of Fintepla’s higher efficacy rate and longer durability. A higher price and longer treatment duration mean that Fintepla ultimately will have higher revenue potential (inclusive of the Lennox-Gastaut syndrome indication) vs. Epidiolex, which currently is annualizing at over $460 million in sales based on GWPH’s 1Q 2020 financial results.

Converting pre-commercial patients into customers is a validated precedent. We have seen this phenomenon play out before with good results. For example Catalyst Pharma (CPRX) launched its Firdapse product for Lambert Eaton Myasthenic Syndrome “LEMS”, in January 2019, and by 3Q 2019 earnings, CPRX reported that over 30% of U.S. patients diagnosed with LEMS were on the drug. Moreover, in the same earnings report, 490 patients had received Firdapse since launch, with about two-thirds of those patients converted from pre-commercial drug availability (trials or compassionate use programs). Note that CPRX became cash flow positive in its first full quarter post-launch of Firdapse. We believe that Zogenix’s launch of Fintepla will follow a similar pattern. Some analysts are speculating that Zogenix may be sandbagging, with pricing estimated at a conservative $96,000 per patient given the weight-based dosing, and that the target market may also be larger than the company is indicating. This may set the company and the stock up for several beat and raise events over the next several quarters, which should fuel consistent upside during that period.

Fintepla expected to be best-in-class, with combination use possible in the most severe patients. As we said in our initial article, Fintepla is expected to offer best-in-class efficacy in Dravet syndrome with more durable responses. Zogenix has completed several clinical studies for Fintepla (fenfluramine oral solution) in the treatment of Dravet syndrome, including Study 1, the company’s Phase 3 trial that evaluated patients with uncontrolled seizures who have Dravet syndrome; Study 1504, key for EU approval and designed to determine the pharmacokinetics “PK” and safety profiles of Fintepla combined with the anti-convulsant drug stiripentol (approved in Europe); and Study 1503, the company’s ongoing open-label extension trial evaluating long-term safety and efficacy of Fintepla. Results for Study 1 were published in the journal, The Lancet in December 2019, and demonstrated a significant, dose-dependent reduction in convulsive seizure frequency in Dravet syndrome patients compared to placebo. The study’s lead investigator, Dr. Joseph Sullivan, UCSF Benioff Children’s Hospital, stated that the results were “tremendously encouraging in reducing the magnitude and duration of seizures” and that “if future outcomes are as positive, it could help clinicians set new standards of care for a treatment-resistant disease like Dravet syndrome”.

While some may think that treatments for these orphan epilepsy diseases are a zero sum game, we believe there is potential for combination use of Fintepla and other anti-epileptic drugs. In a poster presented at the Childhood Neurology Congress in October 2019, results of a Phase 1 study evaluating concomitant use of Fintepla and Epidiolex were reported. The poster states that FFA (fenfluramine or Fintepla) and CBD (Epidiolex) are likely to be co-prescribed in multi-antiepileptic drug treatment regimens typically used to treat Lennox-Gastaut syndrome and Dravet syndrome because both conditions are pharmacoresistant and usually require polypharmacy. Based on the study results, the poster concludes that despite increases in Cmax and Area Under the Curve for Fintepla, the effects of CBD on FFA PK are unlikely to require dose adjustments when coadministered. As a result, it is possible to see combination use of these two agents in the field once Fintepla is approved in DS and other indications. We note that Epidiolex’s label indicates that higher doses of the drug used concomitantly with the anti-epileptic drug valproate, increases the risk of liver enzyme elevations. Fintepla may be a preferred drug for combination use as it is not expected to have similar drug-to-drug interactions, as it has been tested in several trials often in combination with other anti-epileptic agents.

ZGNX now de-risked with potential to get back to the $50-plus range. ZGNX was priced over $50 earlier this year, and with Fintepla now FDA approved, we believe the stock can trade at least back to levels seen in late 2019/early 2020, as the regulatory story is now de-risked and the launch of Fintepla is approaching. With pricing confirmation from the company’s conference call on Friday, we continue to estimate that Fintepla could achieve annual sales of $500 million in the U.S. alone for Dravet syndrome. With international approvals and launches, as well as potential approval of the Lennox-Gastaut indication in 2021, Fintepla has potential to generate as much as $1.5 billion in peak sales.

Upcoming stock catalysts include: U.S. commercial launch of Fintepla in July, potential EU approval for Fintepla in 4Q 2020, potential partnerships to commercialize Fintepla in international territories, FDA guidance on the path forward for Zogenix’s pipeline asset MT1621, and a meeting between the company and FDA later this year on the ability to file for Fintepla to treat Lennox-Gastaut syndrome. With ZGNX trading at less than 1x estimated peak sales of Fintepla, we believe the upside potential will start to attract investors back into the stock in the coming weeks and months.

Disclosure: I am/we are long ZGNX. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.