Zogenix Inc. (web site) is a pharmaceutical company which develops and commercializes medications for central nervous system disorders and pain. Zogenix has commercialized Zohydro, an extended-release hydrocodone for the treatment of moderate to severe chronic pain. The company is currently developing Relday, which is in Phase I clinical trials to treat schizophrenia and bipolar disorder in adults and teenagers 13 years of age and older. The company was founded in 2006, is headquartered in San Diego, and has approximately 110 employees.
Current Market Cap: ~ $210 million
Why Zogenix Shares Were Beat Down in 2014
Zogenix shares were hit hard in 2014, closing the year down 73% from the high of $5.19 made in February. While shares were making this precipitous drop, revenue for the nine months ended September 30, 2014 was $25.6 million, an 11% increase from the $23.1 million in sales during the first 9 months of 2013. In Q3 the company also trimmed losses from .10/share to .09/share.
Despite these positives, shares were under pressure from dilution with approximately 40 million new shares hitting the market in 2014. More significantly, both the FDA and Zogenix received a torrent of negative publicity over the FDA’s approval of, and the company’s commercialization of Zohydro ER.
Zohydro ER is an extended-release form of hydrocodone used for around-the-clock treatment of severe pain. Like any narcotic, Zohydro can be addictive and has the potential for misuse by substance abusers. Even before the drug was launched in March, a group called “Fed UP!” (a coalition to end the opioid epidemic) sent this letter to FDA commissioner Margaret Hamburg imploring her to re-write policies regarding FDA approval of all narcotics and that “the very last thing the country needs is another dangerous, high-dose opioid.”
With 2014 being an election year, some politicians couldn’t help themselves in what I believe was an attempt to win a few votes with the “Act to Ban Zohydro” in March. The lead on this bill was Sen. Joe Manchin ( .). His daughter is the CEO of competing drug company Mylan Inc. which was also a major contributor to his campaign. This is a severe conflict of interest if ever there was one.
The media picked up on the Zohydro story with gusto, with multiple outlets parroting false claims such as:
- Zohydro will kill people as soon as it is released (nobody has died)
- Zohydro is 10 times stronger than Vicodin (it is the same strength)
- It only takes 1 or 2 tablets to kill a patient (untrue)
- Children who take 1 pill will die (unlikely, and how will a child have access?)
- This is the worst decision by the FDA, a disaster and tragedy for this country (it was the right decision)
- Zohydro is more powerful than anything on the market (it is actually the least powerful opioid in its class, when compared to oxycodone or morphine)
Zogenix tried to correct the misinformation spread by the media and politicians in Let’s Get the Facts Straight About Zohydro in May, as did the FDA in this update, but much of the damage to shares had already been done. Never letting facts get in the way of improving their ratings, media outlets continued to perpetuate false claims about Zohydro and shares continued to slide to a low of $1.07 made two weeks ago.
Personally, I trust the judgment of noted pain management specialist Dr. Lawrence Robbins who wrote “Zohydro Debate: Drug Hysteria or True Concern” and FDA Commissioner Margaret Hamburg who discusses the safety and efficacy of Zohydro in this video over a politician with a clear conflict of interest and the media’s falsehoods to boost ratings.
The “Act to Ban Zohydro” is one of over 10,600 bills and resolutions currently before Congress and of those, only about 5% will become law. The web site GovTrack.us gives the Zohydro ban a 0% chance of being enacted. GoveTrack.us is one of the world’s most visited government transparency websites and their embeddable widgets are deployed on more than 80 official websites of Members of Congress.
However, due to the unwarranted controversy and continued misinformation surrounding Zohydro ER, Zogenix shares were sold and shorted throughout 2014. Shares are just now coming off their lows while at the same time 25 million shares are held short.
At MicrocapResearch.com, we like this setup when combined with near-term events in January that we believe will lead to an appreciable recovery.
Why Zogenix Shares Will Recover- PDUFA January 30th
Zogenix submitted a supplemental New Drug Application (sNDA) to the FDA for a new formulation of Zohydro, “Zohydro AD” (Abuse Deterrent). Zohydro AD is more difficult to abuse by injection or nasal insufflation and the FDA’s decision is expected on January 30th. Having already refused to cave in to pressure from a politician who received large campaign contributions from a competitor (and whose daughter is the CEO of that same competitor), the odds of the FDA approving the same drug in a safer formulation that’s harder to abuse appear excellent.
In addition to the likely approval of Zohydro AD on January 30th by the FDA, Zogenix will be initiating the next phase of studies for Relday, a once/month subcutaneous injection for persons suffering from schizophrenia in Q1 of this year.
Phase I trials of Relday were positive and if approved, Relday will be the first subcutaneous antipsychotic product that allows for once-monthly dosing. Non-compliance by patients taking antipsychotics is common and well documented. A once-monthly subcutaneous dose would have obvious advantages for both clinicians and their patients. This is truly a potential blockbuster drug in the Zogenix pipeline- note that sales of the antipsychotic drug Abilify alone were some $5.4 billion in 2011-2012.
Also in development is Brabafen for the treatment a catastrophic form of epilepsy (Dravet Syndrome) for which there is currently no cure. Treatment options are “extremely limited” according to this Dravet Syndrome Foundation Scientific Advisory Board publication. Brabafen had dramatic results in a Belgian study where 70% of patients taking the drug were seizure-free for at least 1 year. Phase 3 clinical trials are expected to begin in Q2.
Shares are now approaching a resistance level around $1.50 that they failed to break for months as shown on the weekly chart below.
We believe shares will break above resistance due to forward events and recent activity in the stock. On December 30th, shares crossed the 100 day moving average on heavy volume, prompting us to make this tweet to notify subscribers we entered the stock at $1.30. Zogenix is one of many high-potential, “best microcaps” we’ve identified, and the volume in crossing the 100 dma is convincing, as was the New Year’s Eve follow-thru on lower, but still respectable volume.
Finally, the odds of a golden crossover look good in Q1…and possibly in the next 2-3 weeks.
The 200 dma will continue a rapid decent for the next month while the 50 dma should begin to slope up given last week’s rise off the bottom. Something to watch for!
The Bottom Line
- Shares of Zogenix have been oversold and over-shorted, due in large part to media misinformation re: Zohydro ER that fueled investor fear
- With year-end tax loss selling over, the January 30th PDUFA date for Zohydro AD, the Q1 pharmacokinetics study of Relday, and sizable short interest in the stock, we believe shares of Zogenix are on the verge of an appreciable move to the upside in January
- Risk of near term share dilution appears mitigated by the company’s $50 million cash balance reported at the end of Q3 combined with the December 31st filing of a credit facility of up to $20 million
Traders may wish to hold off for a break above $1.50-$1.55 resistance- which we believe will take place soon.
We recommend the use of stop-loss orders to preserve capital in all trades.
Supplemental: Zogenix December 2014 Investor Presentation
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Disclosure: The publishers of MicrocapResearch.com are long ZGNX. We have not been paid by any company or third party for this article.