|Shares Out. (in M):||17||P/E||0||0|
|Market Cap (in $M):||87||P/FCF||0||0|
|Net Debt (in $M):||0||EBIT||0||0|
Avenue Therapeutics (“ATXI”) offers 100%+ upside within the next 24 months if its intravenous (“IV”) drug tramadol gets approved and its deal with Cipra is consummated as agreed. We think at prices below <$6.00, ATXI shares have a very attractive risk-reward profile because one is primarily taking FDA / DEA approval risk: (i) tramadol is a proven and approved chemical compound that’s been on the market in its oral form for more than 20 years in the US, (ii) results from the clinical trials are out and they look fine, and (iii) the deal signed with Cipra means that ATXI shareholders will get a pretty well defined pay-out with Cipra taking on all commercialization risk. Based on the Cipra deal, ATXI shareholders will receive $13-14.00 per share plus a Contingent Value Right (“CVR”), and this is only subject to IV tramadol getting FDA approval and DEA Schedule IV classification. Given ATXI has nothing other than IV tramadol, the downside is $0.00.
We’ll go through the drug, its history and clinical results, and last but not least the Cipla deal, which frames the potential outcomes for ATXI shareholders depending on what the US Food and Drug Administration (“FDA”) and Drug Enforcement Administration (“DEA”) end up deciding. The ongoing opioid crisis may act as a deterrent to some as IV tramadol is a weak opioid, however, we believe that opioids do have a role to play in public health despite their abuse risks.
Tramadol in its oral form was first launched in the 70s in Europe and was sold by Johnson & Johnson under the Ultram brand name in the US since the 90s. IV tramadol has been on the market in Europe since 1992 and accounts for ~10% of all IV analgesic use in the post-operative setting in the EU. IMS estimates the number of patients experiencing medium to severe pain in the 7-8 million range in a hospital setting, so the market is quite large. ATXI estimates the relevant market size to be $1bn.
Tramadol is considered a weak opioid agonist with reduced efficacy compared to morphine but also weaker side effects, with reduced risk of addiction. As such, DEA officially reclassified oral tramadol as a Schedule IV substance in 2014, citing tramadol’s superior safety profile as it was pretty widely prescribed by doctors anyways. Its Schedule IV classification has also allowed oral tramadol to escape the declining production quotas for Schedule II opioids, which should, in fact, be a tailwind for alternatives like IV tramadol once it gets approved.
Because tramadol as a chemical compound has already been approved by the FDA, IV tramadol follows the 505b(2) approval path, which are generally more likely to receive final approval compared to New Molecular Entities (“NMEs”) that have to go down the 505b(1) path. In terms of high level probabilities, non-NMEs have a ~90% chance of receiving FDA approval after filing an NDA, although bear in mind that only ~2/3 of all drugs received FDA approval first time around compared to ~85% overall based on industry data.
ATXI has already completed all its Phase 3 studies and the results were very positive, meeting the primary endpoints as well as all key secondary endpoints. It’s noteworthy that ATXI ran a morphine arm in the abdominoplasty study and showed that IV tramadol’s efficacy as measured by SPID24 was only slightly worse than morphine whilst also having a slightly better adverse event profile than morphine. These results are not surprising given tramadol as a chemical compound has been on the market for so long and is pretty well understood by the medical community. This data is clearly important to get FDA approval and supports the overall thesis that IV tramadol should get approval in our view.
Given numerous companies with analgesics received Complete Response Letters (“CRLs”) from the FDA over the past year or so, we’ve spent a lot of time analysing ATXI’s and competitors’ studies and have found no obvious flaws that may lead to a CRL for IV tramadol. ATXI is using the same primary endpoints as Recro Pharma was using for IV Meloxicam, and has already completed a QT/QTc study which Trevena is working on for Oliceridine. Heron got a CRL for manufacturing issues and some non-clinical data and has resubmitted already. ATXI’s manufacturing partner is Polpharma, a reputable Polish contract manufacturer, but so far, ATXI hasn’t qualified a back-up manufacturing partner.
Fortress Biotech first in-licensed the US rights to IV tramadol from Revogenex in 2015, and IPO’d ATXI with its rights to IV tramadol in 2017 at $6.00. IPO proceeds were used to fund the clinical studies and was budgeted to be sufficient to complete all clinical trials. ATXI was running a bit short of funding to complete the second study so in May 2018, ATXI decided to look for a partner upon completion of the bunionectomy study. There were three expressions of interest, which culminated in the deal with Cipla that closed early 2019, which we’ll describe next.
Cipla is an India-based family owned pharmaceutical business that wants to break into the hospital business in the US with an enterprise value of $5bn and revenues of $2.3bn. In a nutshell, Cipla agreed to taking a 33% stake in ATXI via a capital increase at $6.00 (~$35mn in total) and the obligation to buy out non-Cipla ATXI shareholders for ~$13-14.00 if IV tramadol receives FDA approval and Schedule IV classification by DEA plus a CVR. Given where ATXI shares trade now, this represents upside in excess of 100%+ within 2 years.
Condition Precedents to Closing
There are several conditions that need to be cleared before ATXI shareholders can get the final pay-out from Cipla. Key ones are below:
1. Obtaining FDA approval by April 30, 2021,
2. Labelling to contain an indication as moderate to moderately severe (post-operative) pain, not restricted to any specific type of surgery and no requirement to use this in conjunction with other NSAIDs, and
3. Classification by DEA as a Schedule IV drug.
Obtaining full FDA approval may be tight by the April 2021 deadline if ATXI gets a CRL, plus approval delays in excess of 15 months may entitle Revogenex to terminate the IV tramadol license. We don’t think 2. is likely going to be a problem given the way the studies have been set up and the efficacy data. 3. could be problematic, but oral tramadol has Schedule IV classification today, which sets an encouraging precedent. The fact that IV tramadol can be marketed as a (slightly) weaker alternative to morphine, which is a Schedule II opioid, should at the margin help IV tramadol’s case for approval.
ATXI has guided to proceeds of $13.92 per share, however, we prefer to err on the conservative side despite management reassurances that they’ve been on budget so far, because the exact determination of final proceeds is a bit more complicated.
To be precise, Cipla has agreed to pay (a) $180mn to all non-Cipla shareholders of ATXI, less (b) various fees payable to ATXI’s licensing and manufacturing partners, as well as (c) certain advances, indemnifications, and (d) transaction fees. Based on ATXI’s best estimates, ATXI shareholders will get $13.92 per share of proceeds, corresponding to $163mn in net proceeds to non-Cipla ATXI shareholders after various costs have been taken into account.
We won’t dwell on this too much because the revenue hurdles are quite high and we don’t want to worry too much about the ultimate home-run scenarios. In short, the CVR will be paying approximately the following amounts after deductions of COGS, royalties, and miscellaneous expenses:
1. Until 2028: ~$1.80+ per share if annual net revenues exceed $325mn
2. From 2029 until the earlier of (i) 2036, (ii) patent expiry, (iii) FDA approval of another IV tramadol, once this product has cleared $1.5bn in cumulative net revenues: ~$1.15+ per share if annual net revenues exceed $100mn
Non-approval because this is an opioid
We are all well aware of the opioid crisis: many lives are lost as people are unnecessarily put on opioids and get addicted, doctors are being discouraged from prescribing opioids, and multi-billion settlements are being reached by participants along the supply chain. However, the analgesic effects of opioids are unrivalled and don’t carry problematic side effects like elevated bleeding risks that NSAIDs come with. Whilst many analgesics have been failing to get approval, we want to point out that anecdotally speaking, AcelRx’s Sufentanil received approval last year notwithstanding the ongoing opioid crisis.
Non-approval because clinical efficacy data isn’t good enough
This feels rather unlikely given the clinical data.
Non-approval because data is missing
We think that ATXI has covered all bases, but unexpected things can and do trip up approval processes.
This could be problematic given the somewhat tight timeline specified by Cipla, however, as long as FDA doesn’t hand out a “not approvable” verdict, we think Cipla and Revogenex will be reasonable.
Whilst IV tramadol doesn’t enjoy composition-of-matter protection anymore, ATXI holds 4 patents that expire between 2032 and 2036 covering how IV tramadol is administered, for what it’s worth.
We don’t attribute any value to the CVR, so FDA approval and Schedule IV classification will be the key risks to our thesis. Whilst we do think that IV tramadol see good take-up being the only IV opioid on the market should, there’s certainly a fair bit of non-opioid competition in the pipeline and the market isn’t that huge.
Technically speaking, this deal has been done with a Cipra subsidiary called Invagen. In the scheme of things, we think financing risk here is low.
ATXI only has IV tramadol, so this is a very targeted shot on goal.
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Ultimately, it's deal closure. Major catalyst along the way will be (a) FDA approval, and (b) DEA Schedule IV classification