Zogenix: 3 Key Investing Takeaways From 2013

2013 was a year to remember for Zogenix (NASDAQ: ZGNX  ) , the painkiller maker that has rallied more than 135% since the beginning of the year. The company scored a major victory in October when the FDA approved Zohydro ER, its extended-release of the narcotic painkiller hydrocodone.

However, that victory was a highly controversial one, since Zohydro ER is five to ten times more potent than Vicodin, which is a comparatively milder mix of hydrocodone and the non-narcotic painkiller acetaminophen.

Due to its potency, Zohydro was classified as a Schedule II controlled substance due to its potential for abuse. Zogenix, however, believes that there is still a market for the drug, since it does not contain acetaminophen, which could cause liver damage at elevated doses.

ZGNX Chart

Source: YCharts.

To better understand where Zogenix is headed in 2014, let's take a look back at three investing takeaways from Zogenix's volatile but rewarding year, and how its future could also affect Mallinckrodt (NYSE: MNK  ) , Valeant Pharmaceuticals (NYSE: VRX  ) , and Teva Pharmaceutical (NYSE: TEVA  ) .

1. Zogenix by the numbers
Zogenix, which is currently unprofitable, has two main sources of revenue -- net product sales of the injectable migraine drug Sumavel DosePro, which is co-marketed with Mallinckrodt; and service fees from Valeant for the co-promotion of Migranal Nasal Spray, which is used to treat migraine headaches.

 

Q3 revenue

Growth (YOY)

Percentage of total revenue

Sumavel DosePro

$6.9 million

(19%)

96%

Service and other revenue

$271,000

(83%)

4%

Source: Zogenix third-quarter report.

Revenue from Sumavel sales declined, but overall prescriptions and units sold rose 4% year over year -- indicating a decline in overall pricing. Meanwhile, the steep drop in service revenue was due to a large payment from a co-marketing contract with Astellas in the prior-year quarter, which has since been replaced by the new agreement with Mallinckrodt.

Therefore, Zogenix's core business is highly dependent on migraine treatments. However, that market is an increasingly fragmented one, divided among various brands of ibuprofen, acetaminophen, triptans, ergots, opioid drugs, and NSAIDs (non-steroidal anti-inflammatory drugs). That increased competition is most likely the cause for the 19% decline in Sumavel sales.

2. Zohydro ER's price
Based on Zogenix's year-long rally, investors might think that Zohydro ER is a guaranteed blockbuster drug.

However, it's not -- in an investor presentation earlier this month, Zogenix stated that it hoped to generate annual peak sales of $300 million from Zohydro ER, assuming that it can capture 1% of the total market of current hydrocodone users. That estimate assumes that each prescription will cost $7.87 per day (the same price as Purdue Pharma's OxyContin), for a total prescription cost of $236 per patient. Zogenix believes that Zohydro has the potential to eventually treat 1.27 million patients.

Zohydro's price, however, could be the problem. Its $7.87 price (for two pills per day) was intended to match OxyContin, but it simply cannot compete with generic Vicodin, which is manufactured by Teva and other generic manufacturers. Those generic tablets, which are immediate rather than extended-release products, can cost as low as $0.50 per pill.

3. Teva and Purdue could render Zohydro obsolete
To make matters worse, more than two dozen state prosecutors recently sent a letter to the FDA requesting that it rethink its approval of Zohydro ER due to its potential for abuse.

Zohydro is not tamper-resistant, meaning that it can be crushed, injected, and dissolved in alcohol. This could lead to a repeat of Purdue's OxyContin scandal six years ago, when the drug was crushed and injected by drug users to produce a heroin-like high. Purdue and three of its top executives were eventually fined more than $630 million in 2007 for overselling the drug's safety. In response, Purdue introduced a tamper-resistant version of OxyContin in 2010.

The OxyContin scandal led to an increased demand for tamper-resistant drugs that cannot be crushed, injected, or dissolved. Teva is developing a tamper-resistant version of extended-release hydrocodone, which could render Zohydro ER obsolete.

Zogenix intends to launch Zohydro ER by March 2014. Considering that the FDA is now under pressure to rethink Zohydro's approval and Teva's tamper-resistant hydrocodone is already in phase 3 trials, I believe that the FDA could grant Teva's drug a fast-track approval to allay these concerns.

If Teva's drug hits the market earlier than expected, then Zogenix can expect a quick, premature end for Zohydro ER, and the stock could easily give up its triple-digit gains from 2013.

The Foolish bottom line
In closing, Zogenix has very few strengths and plenty of weaknesses.

The company currently has $17.4 million in cash and equivalents, but is shouldered with $28.7 million in debt. The company has been burning through more than $10 million in cash per quarter, and it expects these losses and negative cash flow to continue throughout 2014. Meanwhile, sales of Sumavel DosePro, its only real source of revenue, could continue falling by double digits.

Zogenix is pinning all of its hopes and dreams on Zohydro's launch in 2014, and a lot could go wrong. The FDA could be forced to rethink its approval of the drug, hospitals might decide against prescribing Zohydro due to its price, and a larger company like Teva could introduce a tamper-resistant, extended release of hydrocodone soon.

Therefore, although Zogenix enjoyed a great run in 2013, I believe that the road ahead in 2014 could be a very tough one for this company.

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Read/Post Comments (8) | Recommend This Article (3)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On December 19, 2013, at 12:46 PM, Mrmichael44 wrote:

    This article makes valid points, but it is obvious it is written by someone in finance with no understanding of pain management. Patients starting in pain management for whatever qualifying condition, are usually given a weak opioid such as vicodin. If long term therapy is warranted, the patient is then prescribed a long acting opiate. Following opiate step protocol, previously this was OxyContin. Physicians don't pick their "favorite" pain medicine to prescribe, it doesn't work like that. Patients are prescribed the weakest opiate and then titrated upward. The weakest long acting opiate on the market used to be OxyContin. Now with Zohydro available, patients will be prescribed this FIRST. If Zohydro isn't strong enough, THEN OxyContin will be prescribed. Then Exalgo, Opana, Morphine, so on & so on. It is dangerous for patients to remain on Vicodin or another combination hydrocodone product long term because of the serious liver risks from acetaminophen. The FDA has been pushing the acetaminophen issue now for a couple years, there was even talk of banning Vicodin, not because of overdoses, but because of acetaminophen toxicity. Look it up.

    At the end of the day, I predict Zohydro replacing approximately 60% of OxyContin prescriptions. Look how many more prescriptions there are for Vicodin than Percocet. Again, patients are prescribed the weakest drug first to see if it does the job. The Attorney Generals think Zohydro will add to illegal drug use, but what will happen is the number of OxyContin on the street will plummet. Addicts much prefer oxycodone because hydrocodone has a ceiling effect. After a short time, the addict can't get high. I've seen thousands of addicts in withdrawal, hydrocodone wd is like having the flu for a week. Oxycodone withdrawal is much more serious, hospitalizations are much more common.

    Unfortunately, abuse resistant technology currently is terrible. The large drop in OxyContin prescriptions after the reformulation was due to serious side effects from ingesting the polymer and ineffectivenesa if the reformulation. Purdue won't tell you this, but Google "new OxyContin OP pain forum" and read for yourselves all the postings from hundreds of OxyContin patients that had side effects, dose increases, or switched drugs altogether because of the reformulation. The FDA is very aware of the shortcomings of abuse resistant technology and addressed that concern in the Approval of generic Opana without abuse resistance.

  • Report this Comment On December 19, 2013, at 12:58 PM, Mrmichael44 wrote:
  • Report this Comment On December 19, 2013, at 10:38 PM, papete wrote:

    The author conveniently omitted the fact that Zogenix has an established partner for the development of a tamper proof Zohydro ER formulation. This author must be short on ZGNX, he also conveniently left that out of the article.

  • Report this Comment On December 20, 2013, at 10:06 AM, optionsmaster wrote:

    Obviously, you're short on this stock.

    Here's my 3 takeaways:

    1. Hydrocodone ER is long overdue and Zogenix will benefit greatly for being first to market.

    2. Teva and Purdue will not get FDA approval for their me too version of Zohydro. Too much political pressure will keep another Extended release Hydrocodone into the market.

    3. Pfizer could be salivating at buying Zogenix. Remember their previous failed attempt cost them over $1 Billion.

    and actually 4 reasons: Management team is top notch. They have experience in launching new products.

    Also... You must be CRAZY to short a $3 stock! What were you thinking???

  • Report this Comment On December 20, 2013, at 10:53 AM, Mrmichael44 wrote:

    They didn't short Zogenix, they just don't want them to succeed because they are really pumping Teva and Valeant Pharm. When Zogenix really takes off they will look 'foolish' (pun intended) for pumping Teva as hard as they are. Unfortunately for them, the first product to market almost always becomes the standard, especially for this product because there is a patent on the 10,15,30,40 & 50mg strengths. Abuse resistant products will require higher strengths because of the shortcomings of the technology, but I feel a 90 & 150mg ER hydrocodone will be hard to get approved. Purdue's 24 hour dose is guaranteed to be much less effective. Their OxyContin barely lasts 8 hours in most patients. Here is the quote from below the above article stating that Motley Fool is promoting Teva and Valeant:

    "Fool contributor Leo Sun has no position in any stocks mentioned. The Motley Fool recommends Teva Pharmaceutical Industries and Valeant Pharmaceuticals."

  • Report this Comment On December 20, 2013, at 11:07 AM, optionsmaster wrote:

    OK, Leo Sun has no personal short positions, but he's doing somebody a big favor to thumb down the stock or shake the weak holders.

  • Report this Comment On December 20, 2013, at 11:28 AM, papete wrote:

    I stand corrected, the author is not short on ZGNX. However, he may as well be, because he is helping to pump Teva and Valeant.

  • Report this Comment On December 20, 2013, at 2:16 PM, TMFSunLion wrote:

    Hello all,

    No, I don't have any positions in these stocks. And no, this doesn't help "pump" Teva or Valeant. The news about hydrocodone is too minor to actually matter to the top line for both of those companies.

    I haven't been bullish on Teva's prospects either:

    http://www.fool.com/investing/general/2013/11/27/could-teva-...

    My main concern about Zogenix is simple -- tamper-proof hydrocodone could render Zohydro, which is already being protested by 28 states, to be pretty irrelevant. Zogenix's own projections are way too high, in my opinion.

    But let's agree to disagree, cheers. :)

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