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Alexza Pharmaceuticals Initiation of coverage All eyes on Adasuve Pharma & biotech Alexza's investment case rests on the commercial prospects for Adasuve, 27 August 2013 a potentially disruptive new product for acute agitation in adult schizophrenia or bipolar disorder patients. Adasuve (Staccato loxapine) was launched in Germany by Ferrer, and its US launch by Teva is expected Price US$4.35 Market cap US$75m in Q114. Adasuve offers speed and dosing reliability advantages in treating acute agitation, and we estimate global sales of over $200m by 2018, assuming a 20% peak market share. Its potential underpins our valuation of $6.77/share, with upside from successful development of further products using the Staccato inhaled delivery device. Net cash ($m) Q213 32 Shares in issue 17.2m Free float 96% Code ALXA Primary exchange Year end 12/11 12/12 12/13e 12/14e Revenue ($m) 5.7 4.1 46.5 8.5 PBT* ($m) (36.5) (34.9) (3.7) (22.8) EPS* ($) (5.38) (2.80) (0.22) (1.29) DPS ($) 0.0 0.0 0.0 0.0 P/E (x) N/A N/A N/A N/A Yield (%) N/A N/A N/A N/A NASDAQ Share price performance Note: *PBT and EPS are normalised, excluding intangible amortisation, exceptional items. Adasuve’s rapid time to effect a key advantage Adasuve’s rapid time to therapeutic effect (10 minutes) vs intramuscular drugs (3090 minutes) or oral forms (>60 minutes) commonly used for acute agitation is a substantial advantage given the risk of physical injury or property damage with agitated patients in whom agitation is escalating. Current treatment options are either slow to act or invasive, and are often dosed in combination. While Adasuve will have a premium price of $75-100/dose (vs <$10 for most oral drugs, which are 1m 3m 12m Abs (2.9) (5.2) 3.8 often dosed in combination and re-dosed during an agitation episode), we believe that the advantages of quick effect and ease of administration will position Adasuve as a key agent for initial treatment of agitation in medical emergency settings. Rel (local) (0.9) (5.6) (11.6) Pulmonary concerns not a significant deterrent Alexza Pharmaceuticals is a US-based company developing products for acute CNS disorders using its proprietary Staccato aerosol rapid drug delivery system. Lead product Adasuve is approved in the US and EU for acute treatment of agitation in patients with schizophrenia or bipolar disorder. As patients with active airway disease had higher respiratory events vs placebo in safety studies, the FDA required a REMS protocol with Adasuve’s approval. However, as few respiratory events occurred in the pivotal studies, we believe that the respiratory toxicity risk is minimal and should not significantly deter physicians and facilities from using the drug; we estimate a 20% peak market share. Alexza to advance AZ-002 and other Staccato drugs Adasuve’s approval validates the underlying technology of the Staccato platform and Alexza is advancing AZ-002 (Staccato alprazolam) as a treatment candidate for acute repetitive seizures in epilepsy patients. A Phase II study is expected to start in H213, while further development candidates may be announced in H114. % 52-week high/low US$6.2 Business description Next events Adasuve US launch by Teva Q413 AZ-002 start Phase II trial H213 Analysts Pooya Hemami Christian Glennie +1 646 653 7026 +44 (0)20 3077 5727 [email protected] Valuation: rNPV of $85m represents upside US$3.9 Edison profile page We calculate an rNPV for Adasuve and AZ-002 at $85m. Adding $32m in net cash (Q213) gives a $6.77 per share valuation for the firm. This represents clear upside to Alexza’s $4.32 share price. We do not specifically value the Staccato platform technology, which we believe can be extended into other pharmaceutical ingredients and presents additional value-creation opportunities. Alexza Pharmaceuticals is a research client of Edison Investment Research Limited Investment summary: Gearing up for Adasuve launch Company description: Staccato inhalation delivery platform Alexza Pharmaceuticals is a California-based pharmaceutical company developing products using its proprietary Staccato inhalation platform, which provides rapid and efficient drug delivery. Its lead product, Adasuve (Staccato loxapine), has been approved in the US and EU to treat agitation in patients with schizophrenia or bipolar I disorder, and was launched in Germany by European commercial partner Ferrer, and is expected to be launched by US partner Teva in Q114. We estimate peak global Adasuve revenue of $230m in 2022 and sustained profitability from 2016. The firm is also developing AZ-002 (Staccato alprazolam) for acute repetitive seizures (ARS), which will enter a Phase II study in H213, and we anticipate Alexza will announce a new development programme in H114. Valuation: rNPV of $85m indicates upside potential We calculate an rNPV for Adasuve and AZ-002 at $85m. Adding $32m in net cash (Q213) gives a $6.77 per share valuation for the firm. This represents clear upside to Alexza’s $4.32 share price. This includes peak Adasuve sales of $230m and a 25% probability of success for AZ-002. We apply a 12.5% cost of capital. Our assessment does not specifically value the Staccato platform technology, which we believe can be extended into other active pharmaceutical ingredients and presents additional value-creation opportunities in acute treatment settings. As the firm extends its Staccato development pipeline in the coming quarters, these opportunities may provide further upside to our valuation. Sensitivities: Regulatory, IP and commercial execution Alexza’s valuation is principally tied to Adasuve’s prospects. Pulmonary concerns in patients with active airway disease (specifically asthma and COPD) in early clinical studies prompted regulators to require risk management programmes (REMS) and post-marketing studies. Unfavourable study data could lead to restrictions that could impair the drug’s penetration rate. We model Adasuve having market exclusivity until 2022 (expiry date of key composition patents), but a five-year patent term extension could be granted to strengthen the commercial window of the product, and the complexity of the Staccato device could add barriers to would-be generic competitors once patents expire. Alexza is also dependent on partners for the components used in Adasuve manufacturing, and unforeseen supply interruptions could affect product availability. While we believe that current partners Teva and Ferrer are committed to ensuring a strong commercialisation effort, sub-optimal marketing activities could affect product penetration. Financials: Further financing likely prior to reaching profitability Alexza finished Q213 (30 June 2013) with $32m in net cash (after having received $40m upfront in May 2013 as part of Teva’s US licensing deal) and has guided that its current cash on hand (with the exercise of a $25m five-year note from Teva) will fund its operations through to Q314. While Teva is responsible for funding the required US post-marketing studies and commercialisationrelated obligations, we expect Alexza’s R&D costs to remain in the $20m/year range as it spends on AZ-002 and other pipeline projects. In addition, Alexza must fund the post-marketing Adasuve commitments in Europe (which we estimate will cost $5m between H213 and end 2015). In addition to the Teva note (with 50% of any outstanding balance convertible at Teva’s option to Alexza equity at $4.4833/share), we estimate that Alexza will need to raise c $10m in additional debt in 2015 to sustain its operations until Adasuve revenues are sufficient to sustainably generate positive free cash flows, which we expect will occur in FY16 (once worldwide sales exceed $110m). Alexza Pharmaceuticals | 27 August 2013 2 Outlook: Adasuve launch underway Alexza is focused on supporting the upcoming commercial efforts of its licensing partners, Teva and Ferrer, as Adasuve is launched in the US and multiple EU markets over the coming months, and on strategic pipeline investments. Adasuve offers speed and dosing reliability advantages in acute agitation settings, which should drive product uptake. Alexza’s Staccato device platform is also being assessed in AZ-002 for ARS, and future product candidates. Adasuve’s commercial prospects in acute markets, and the potential for future products using the Staccato platform, underscores the investment case for Alexza. Will rapid effect and dosing convenience override respiratory concerns? Alexza has received FDA and EU approval for Adasuve for the acute treatment of agitation in adults with schizophrenia or bipolar I disorder (BPI), and has secured partnerships with established and recognised pharma companies. The key question for Alexza and its partners is how Adasuve’s potential benefits for the agitation markets, as a rapidly-acting, non-invasive treatment option, compare with its potential drawbacks (risk management programme and expected premium price) versus oral or intramuscular (IM) drugs. Review of agitation and established treatment approaches Agitation episodes occur in many people suffering from major psychiatric disorders, including schizophrenia and bipolar disorder, and are frequently treated in emergency room settings, psychiatry departments/wards of hospitals, or in psychiatric hospitals. The US National Institute of Mental Health estimates that in the United States, c 2.4m adults (1.1% prevalence) have schizophrenia and c 5.7m adults (2.6% prevalence) have bipolar disorder. Approximately 1.7-1.8m 1,2 medical emergency room visits in the US per year may involve agitated patients. Up to 8m adults 3 in the EU have schizophrenia or bipolar disorder. The treatment paths for agitated patients vary from facility to facility, such as between emergency psychiatry (EP) units and full hospitals with medical emergency rooms (MER); in some EP clinics, a majority (c 75%) of outpatient agitated patients will be discharged within 24 hours, and in others (more often MERs) a similar or higher proportion will be admitted (to the psychiatry wards) for periods of several days or longer. Agitated individuals generally exhibit restlessness, pacing and unpredictable behaviour, and are at risk of becoming aggressive and violent. A survey of US psychiatric emergency services estimated 4 that agitation led to an average of eight patient-to-staff assaults per facility per year. If agitation is not treated quickly and effectively, it can escalate unpredictably and introduce significant safety risks to staff and the patients. When faced with an agitated patient, non-pharmacologic approaches (such as verbal de-escalation and reducing environmental stimulation such as lighting and noise) 5 are first attempted, but often these are unsuccessful and medications are required. The current standard of care involves antipsychotic medications, such as first-generation antipsychotics (FGAs) like haloperidol or second-generation antipsychotics (also referred to as atypical antipsychotics, or APs) such as olanzapine (Zyprexa), ziprasidone (Geodon) and aripiprazole (Abilify) – these drugs are all available in intramuscular (IM) or various oral dosage forms, although only the IM forms are 6 approved for treating acute agitation. Haloperidol (a dopamine-2, or D2, receptor blocker) has a long history of use in agitation, but it can lead to cardiac arrhythmias and may induce acute 1 Zeller SL, Rhoades RW. Clin Ther. 2010;32:403–425. Sachs GS. J Clin Psychiatry. 2006;67 Suppl 10:5-12. Wittchen HU et al. Eur. Neuropsychopharmacol. 2011:21, 655-679. 4 Allen MH, Currier GW, Hughes DH, Reyes-Harde M, Docherty JP. The Expert Consensus Guideline Series. Treatment of behavioral emergencies. Postgrad Med.2001 May:1-88. 5 Wilson MP, Pepper D, Currier GW, et al. West J Emerg Med. 2012 Feb;13(1):26-34. 6 Marder SR. J Clin Psychiatry. 2006;67 Suppl 10:13-21. 2 3 Alexza Pharmaceuticals | 27 August 2013 3 extrapyramidal side effects (EPS) such as dystonia, movement disorders or neuroleptic malignant syndrome. APs are also D2-receptor antagonists, but also block receptor subtypes, notably serotonin-2A (5-HT2A), and have a lower risk of EPS than FGAs. Benzodiazepines (which act on the GABA brain receptor), such as lorazepam, are also used for agitation as they have a sedating effect, but unlike antipsychotics, they do not treat the underlying psychiatric disease responsible for the agitation, and also may cause respiratory depression or hypotension. Given the desire for rapid therapeutic effect to reduce the risk of symptom escalation or harm to the patient or staff, IM formulations of antipsychotics can be used and offer a more rapid onset of effect than oral formulations. However, patients can be resistant to IM injection, presenting added physical injury risks to both patients and caregivers, as well as the potential for mental trauma to the patient that can compromise patient-physician relationships and cause longer-term effects on treatment compliance. Despite their slower therapeutic effect in potentially volatile and unpredictable patient scenarios, oral drugs are often the first drug class employed in agitation scenarios (despite not being approved for the condition); current guidelines from the American Association for Emergency Psychiatry recommend that for agitation cases involving psychoses, oral antipsychotics should be employed before IM formulations. However, as oral drugs take 30 to 60 minutes to start exerting effects, agitated patients still pose a risk of injury or property damage until a therapeutic effect is attained. All in, the bulk of cases are treated with oral drugs, and IM drugs are employed in up to 10-30% of agitation cases (ie practitioners have to use IM drugs if the patient is uncooperative). Staccato delivery provides rapid, non-invasive treatment Alexza’s lead product Adasuve (Staccato loxapine) aims to address the discrepancy between the need for rapid onset of anti-agitation effects and the slow onset of the most frequently utilised treatments for agitation, while also offering a reliable and more patient-friendly mode of drug administration. Loxapine is an FGA marketed since 1975 for use in schizophrenia. Its mechanism of action involves D2 and 5-HT2A receptor antagonism. At the core of Alexza’s technology platform and the Adasuve product is the firm’s proprietary Staccato technology, which provides rapid drug delivery through inhalation. While other inhalation platforms exist, obtaining appropriate drug particle sizes or consistent emitted doses may be challenging for many drug molecules; to our knowledge, no other inhalation platform has been shown to efficiently deliver an antipsychotic medication quickly enough to be competitive with IM drugs’ time to effect. The Staccato system vaporises an excipient-free drug to form a condensation aerosol that enables rapid drug delivery in a user-friendly manner. It consists of three components: a heat source (inert metal heat plate), a thin film of active pharmaceutical ingredient (API), and an airway. Upon activation, the heat plate rapidly heats and vaporises the drug film, and the drug vapour subsequently cools and condenses into right-sized aerosol particles drawn into the patient’s lungs; the entire system actuation occurs in under one second (Exhibit 1). Exhibit 1: Staccato device system Source: Alexza presentation, June 2013 Alexza Pharmaceuticals | 27 August 2013 4 The Staccato system is activated by the user’s breath – the patient simply inhales to receive the drug dose, and does not require caregiver assistance or need to modify the breathing pattern. The produced aerosol is relatively insensitive to patient inhalation rates. Oral inhalation through the device initiates the immediate and controlled rapid heating of a thin film of drug (in Adasuve’s case, excipient-free loxapine) to form a highly pure drug vapour, which condenses into aerosol particles with a particle size distribution that enables rapid and efficient delivery to the deep lung. Peak plasma levels in the systemic circulation is achieved within two minutes after administration; hence the Staccato device provides speed of therapeutic onset that is comparable to intravenous (IV) administration (and thus quicker than IM administration), but with greater ease, patient comfort and convenience. Further, due to the rapid delivery/presentation of drug upon detection of inspiration, over ~90% of the drug is inspired/inhaled within seconds, providing a high degree of drug delivery reliability and better ensuring compliance vs oral drugs where ‘cheeking’ can occur (where patients only pretend to swallow the medications and secretly insert the pill in their cheek, which may not always be detected by the healthcare practitioner). Rapidity of Adasuve response – a needed attribute in emergency settings In our discussions with practising US psychiatrists treating agitation, we learnt that the duration (3060 minutes) before oral drugs start to reduce escalation of agitation symptoms is very often a pressing concern, as many patients can injure staff or themselves or damage property during this interval. There is also a general apprehension towards using IM drugs in the first line. The physicians we consulted with suggested that they see Adasuve as a potential breakthrough given its rapid response in a non-invasive formulation, offering a treatment option that does not require physicians to trade-off either speed of effect or non-coercive dosing. In Exhibit 2 we summarise key differences in Tmax between other commonly used drugs for agitation and Adasuve. Exhibit 2: Common pharmacological treatments used in treatment of agitation Route of administration Oral Oral Oral Oral Intramuscular Intramuscular Intramuscular Intramuscular Intramuscular Inhalation Generic name Risperidone Olanzapine Haloperidol Lorazepam Ziprasidone Olanzapine Aripiprazole Haloperidol Lorazepam Loxapine (Adasuve) 10mg Drug class Atypical antipsychotic Atypical antipsychotic First-generation antipsychotic Benzodiazepine Atypical antipsychotic Atypical antipsychotic Atypical antipsychotic First-generation antipsychotic Benzodiazepine First-generation antipsychotic Tmax* 1h 6h 30-60min 20-30min 15min 15-45min 1h 30-60min 20-30min <2min Sources: Wilson MP, Pepper D, Currier GW, et al. West J Emerg Med. 2012 Feb;13 (1): 26-34; Draft document from Alexza to PDAC Committee (December 2011); Edison Investment Research. Note: *Tmax refers to time after drug administration where maximal plasma concentration is reached. As shown above, the Tmax for Adasuve, at under two minutes (as determined through Alexza’s pooled analysis of 115 subjects in Adasuve Phase I studies 004-103, 004-106, 004-107) is significantly faster than any other IM or oral drug used for agitation. For treatment efficacy, the Positive and Negative Symptom Scale, Excited Component (PEC) scale is often used, with lower scores from baseline reflecting decreased states of agitation. Each of Alexza’s Phase III pivotal studies (004-301 for agitated schizophrenia patients; 004-302 for agitated bipolar I disorder patients) showed statistically significant (p<0.0001) improvements in PEC scores vs baseline compared to placebo at two hours (the primary endpoint). The magnitude of PEC score improvements were at the high end (8.6 to 9.2 points) compared to marketed IM drugs, suggesting that Adasuve’s efficacy at two hours is broadly competitive with marketed IM drugs, although headto-head studies were not conducted. In time to statistically significant treatment effect vs placebo, Adasuve appears to outperform other products (Exhibit 3). Both pivotal studies showed statistically significant differences vs placebo starting at 10 minutes (the first period where PEC measures were taken in these trials; measures Alexza Pharmaceuticals | 27 August 2013 5 were taken at 10, 20, 30, 45, 60, 90 and 120 minutes post-dosing). IM olanzapine only started to show differences at 30 minutes and IM aripiprazole did at between 45 and 120 minutes (depending on the study and trial). Exhibit 3: Comparisons of pivotal trial data between Adasuve, IM Aripiprazole and IM Olanzapine Drug and dosage Agitation indication Adasuve (inhaled loxapine), 10mg Schizophrenia Bipolar I disorder IM Olanzapine, 10mg Schizophrenia Schizophrenia Bipolar I disorder IM Aripiprazole, Schizophrenia 9.75mg Schizophrenia Bipolar I disorder Comparator data IM Haloperidol Schizophrenia Schizophrenia Schizophrenia Schizophrenia IM Lorazepam Bipolar I disorder Bipolar I disorder Treatment arm/ Mean reduction in placebo arm PEC at 120min vs sizes baseline Time to first significant Time to significant Study identifier reduction in PEC score difference in responders vs placebo (>40% PEC response) vs placebo* 10min 10min 004-301 113 / 115 8.6 105 / 105 131 / 54 46 / 45 98 / 50 57 / 62 9.2 7.74 8.95 8.98 7.82 10min 15min 30min 30min 45min 10min 120min 120min 120min 60min 004-302 F1D-MC-HGHB F1D-MC-HGHV F1D-MC-HGHW CN 138050 175 / 88 75 / 73 7.99 8.74 120min 90min 120min 90min CN 138012 CN 138013 126 / 0 40 / 0 60 / 0 185 / 0 51 / 0 68 / 0 7.63 7.29 7.32 8.25 9.57 6.08 N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A F1D-MC-HGHB F1D-MC-HGHV CN 138050 CN 138012 F1D-MC-HGHW CN 138013 Sources: Draft document from Alexza to PDAC Committee (December 2011); Edison Investment Research. Note: *In the IM Aripiprazole responder analysis in patients with schizophrenia, the only assessment times reported in available data were at 60 and 120 minutes. In patients with bipolar disorder, the IM Aripiprazole/placebo comparison failed to achieve statistical significance at 30, 45, or 60 minutes, but was significant at 90 minutes. In the IM Olanzapine responder analysis in patients with schizophrenia, the only reported assessment vs placebo in available data was at 120 minutes. In patients with bipolar disorder, the only pairwise comparison reported in available data was at 120 minutes. Both Adasuve studies also showed significant improvements in treatment response (defined as a 40% decrease from baseline in the PEC score) starting at 10 minutes, again a more quick response than the measured paired differences in IM aripiprazole and olanzapine. Despite this timely treatment effect, in terms of marketing against competing products, given that Adasuve was not tested head to head, the company cannot in its promotional materials explicitly indicate that it acts more quickly than the others; however, US and European regulators allowed the company’s formal drug label (prescribing information) to indicate that the drug effect of Adasuve was apparent at 10 minutes following dosing – a criterion that none of the competitors are allowed to indicate, and would imply that Adasuve offers a faster treatment effect. In addition, the PEC score reduction vs time post-dosing curves (which we expect that physicians will pay attention to) clearly show a more rapid effect in PEC score for Adasuve vs IM olanzapine, aripiprazole and haloperidol. As shown in exhibits 4 to 7 below, Adasuve causes a circa eight point reduction in the PEC score within 30 minutes of dosing across both pivotal trials, whereas olanzapine, aripiprazole, haloperidol and lorazepam all have shown slower rates of PEC reduction. Alexza Pharmaceuticals | 27 August 2013 6 Exhibit 4: Mean change from baseline in PEC score through two hours after a single dose in agitated patients with schizophrenia (Study 004-301) Exhibit 5: Mean change from baseline in PEC score through two hours after a single dose in agitated patients with bipolar disorder (Study 004-302) Source: FDA Adasuve drug label, citing Study 004-301 Source: FDA Adasuve drug label, citing Study 004-302 Exhibit 6: Scores of inpatients with schizophrenia spectrum disorders on the PEC scale from baseline to two hours after the first IM injection of olanzapine, haloperidol or placebo Exhibit 7: Time course of mean change in PEC score from baseline at 0 hours to two hours post initial dose Source: Wright P, et al. Am J Psychiatry. 2001;158(7):1149-1151. Source: Tran-Johnson TK, et al. J Clin Psychiatry 2007;68:111-119 In addition to a faster treatment effect vs both orals and IM drugs, we believe another advantage of Adasuve vs oral drugs is the greater certainty of dosing administration due to the product’s delivery mechanism; the device only releases drug once inhalation is detected (and is displayed through an indicator) and normally the drug dose would be >90% absorbed within seconds upon normal inhalation; the health care practitioner (HCP) can monitor the patient at this time to ensure inspiration was completed with the device in-mouth; however, with oral drugs, due to ‘cheeking’ potential, there may be less reliability in ensuring that the drug was properly administered. Pulmonary concerns the primary drawback Adasuve’s potential Achilles heel is stakeholder concerns about possible pulmonary effects (none of the other adverse events experienced in the clinical programme were attributed as possibly due to treatment). In fact, the FDA issued a Complete Response Letter (CRL) in 2010 to Adasuve’s initial 2009 US New Drug Application (NDA) citing such concerns and Alexza responded in its 2011 resubmission with a new safety data analysis from the three pulmonary safety studies and a Alexza Pharmaceuticals | 27 August 2013 7 7 proposed risk mitigation strategy. A Phase I spirometry safety study (004-104) in healthy patients (n=30) showed no difference in the proportions of patients obtaining a >10% decrease in FEV1 (forced expiratory volume, or the volume of air exhaled in the first second of a forced exhalation starting from a position of full inspiration) vs placebo upon Staccato device deployment. However, in similar studies in patients with asthma or chronic obstructive pulmonary disease (COPD), the drug was associated with a reduction in FEV1. In a study of asthma patients (004-105), airway-related adverse events (eg bronchospasm, wheezing, etc) occurred in 53.8% of Adasuve-treated patients vs 11.5% of those on placebo. In a similar study of COPD patients (004-108), 19.2% of Adasuve patients had such AEs vs 11.1% in placebo. The proportion of Adasuve-treated patients in the asthma study (n=26) with reductions of FEV1 post-dosing of ≥10%, ≥15% and ≥20% were 84.6%, 61.5% and 42.3%, respectively, vs 11.5%, 3.8% and 3.8% for the placebo arm (n=26), respectively. The proportion of Adasuve-treated patients in the COPD study (n=25) with reductions of FEV1 postdosing of ≥10%, ≥15% and ≥20% were 80%, 56% and 38.5%, respectively, vs 66.7%, 33.3% and 11.1%, respectively, for placebo (n=27). All respiratory AEs in the Adasuve arms in both studies were either self-limiting or readily managed with an inhalable bronchodilator. It should be noted that patients with significant pulmonary disease were excluded from the Phase III pivotal studies. Adasuve was very well tolerated in patients without active airway disease; among the 1,095 such study subjects dosed with Adasuve across the clinical programme, only one (0.09%) required treatment (usual dose of inhaled albuterol) for postAdasuve airway related symptoms (bronchospasm). There was also no evidence for additional risk of an airway AE following a second or third dose of Adasuve. In addition, 86.7% of participating patients in the Phase II/III Adasuve programme were current or former smokers (thus a percentage of these likely had some pulmonary impairment at baseline); hence smoking did not increase airway-related AE risk. Further, none of the patients with a prior history of asthma or COPD (~7% of enrolled) who received Adasuve in the Phase II or Phase III trials had an airway AE or required bronchodilator therapy. REMS protocol requirements may restrain drug usage While clinical data suggests to us that the risk of pulmonary AE or bronchospasm in agitated patients (even with a majority being smokers) without significant active airway disease would be very low (and likely manageable with inhalable bronchodilator drugs), the FDA’s approval carried a black box warning that Adasuve can cause bronchospasm that can potentially lead to respiratory distress or arrest, and that the drug can raise mortality risk in elderly patients with dementia-related psychosis (this latter warning is also found in all other approved antipsychotic drugs for agitation and is not a concern). The FDA also required a Risk Evaluation and Mitigation Strategies (REMS) programme as part of Adasuve’s approval to mitigate the potential for negative outcomes in the event of Adasuve-induced bronchospasm. Core components of the US REMS programme include: Facility certification. Adasuve can only be dispensed in healthcare settings that are certified to dispense Adasuve and enrol in the Adasuve REMS programme. Facilities must be equipped to provide immediate onsite access to an inhaled and nebulised short-acting beta-agonist bronchodilator (such as albuterol). Each certified facility must have immediate access onsite to equipment and staff trained to provide advanced airway management (AAM), including intubation and mechanical ventilation. Prior to treatment, patients must be screened for a history of asthma, COPD, other lung diseases and must be examined for respiratory abnormalities. Adasuve can only be administered once within a 24-hour period, and cannot be dispensed for outpatient use. 7 A second CRL was issued in May 2012 citing minor manufacturing concerns, which were addressed in a June 2012 NDA resubmission by Alexza; Adasuve received FDA approval in December 2012. Alexza Pharmaceuticals | 27 August 2013 8 Following Adasuve administration, patients must be monitored at least once every 15 minutes for signs of bronchospasm for at least one hour. Based on our discussion with physicians, while the REMS programme limits Adasuve usage into an acute medical setting, most of its components will not be significant deterrents for physicians prescribing Adasuve; the requirement for detailed history-taking (including of prior lung diseases) is already standard procedure. The once-daily dosing is also not a barrier, given the therapeutic intent would often be to calm the patient with a rapid-acting drug and then transition them to oral drugs over time. The need to monitor patients for an hour post-dosing should have little effect on patient flow, as the standard-of-care for acute agitation already requires frequent patient monitoring. Of the REMS criteria, we view the requirement for AAM capabilities as being the most likely to affect physician willingness to use Adasuve. While the need for AAM will be a non-issue in an MER department (as equipment and trained staff are already present), some EP facilities will require adding AAM capabilities if they are not in very close proximity to a hospital/MER setting. For such EP facilities, there may be some reluctance among HCPs to learn intubation procedures. Partly mitigating this risk in the US market is that while EP facilities will likely individually encounter more acute agitation cases than an MER in a hospital, there are many more MER units than EP facilities in the US (~4,500 vs ~200), where the need for AAM will not be a concern. The risk of pulmonary effects from existing clinical data appears low and our discussions with physicians suggest that most will not be overly concerned with this risk given the safety data from the Phase III studies (as no patient required AAM). As post-marketing safety data is accumulated, it remains feasible that some aspects of the REMS could be lessened within two to three years. Premium pricing vs established agitation drugs a potential disincentive Adasuve will be priced at a premium level vs existing acute agitation products (Exhibit 8 shows that most currently used drugs cost under $10/dose while Adasuve will be priced at US$75-100/dose). A per-individual drug dose comparison may not capture total treatment cost differences, given that agitation episodes are currently often treated with multiple dose combinations of antipsychotic and benzodiazepine drugs (whereas the majority of treated patients in the Phase III trials only needed a single Adasuve dose to control their agitation), and benzodiazepines often cause over-sedation, prolonging patient stays and increasing indirect costs. Nonetheless, the per-dose cost differential vs Adasuve may pose an initial barrier towards the drug’s penetration, but we believe that hospital pharmacists and administrators will recognise the drug’s indirect cost savings (notably lower likelihood for property damage or patient/staff injury) versus slower-onset or IM drugs as a meaningful treatment advantage. Hence, the high price may curb initial penetration but, as recognition of the speed of onset and ease of administration advantages spread throughout the medical community, we expect the penetration rate to rise. Exhibit 8: US pricing examples of selected drugs used for acute agitation Product Adasuve (inhaled loxapine) Olanzapine (oral) Olanzapine (IM) Aripiprazole (IM) Aripiprazole (oral) Haloperidol (oral) Haloperidol (IM) Ziprasidone (IM) Ziprasidone (oral) Risperidone (oral) Lorazepam (oral) Lorazepam (IM) Approximate price ($) per dose 80.00* 5.80/8.80 20.40 8.50 8.95 0.10 1.60 7.75 3.80 0.15 0.04 5.40 to 6.30 Dose quantity 10mg 5mg/10mg 5-10mg 9.75mg 10mg 5mg 5mg 20mg 20mg 2mg 2mg 2mg Source: Edison Investment Research, ZenRx, various sources. Note: *Pricing has not been formally specified, but Alexza has guided for a $75-100 price range. Alexza Pharmaceuticals | 27 August 2013 9 Capable marketing partners for Adasuve in Teva and Ferrer In October 2011, Ferrer entered a commercialisation arrangement with Alexza to commercialise Adasuve in Europe, Latin America, Russia and CIS, and in May 2013, Teva Pharmaceuticals entered a partnership agreement with Alexza to commercialise the drug in the US market. Teva paid $40m upfront, which in our view adds validation to the commercial opportunity and signals its confidence in Adasuve’s prospects. Teva appears to be a suitable fit for Adasuve given its familiarity and experience in the psychiatry and hospital markets, as Teva is the leading supplier of generic clozapine, an AP indicated for treatment-resistant schizophrenia. Teva also provided up to $25m to Alexza as a five-year note bearing 4% pa (with 50% of any outstanding balance convertible at Teva’s option into Alexza shares at $4.4833/share). The exhibit below shows the key characteristics of both licensing deals. Exhibit 9: Summary of licensing terms of Adasuve partnerships with Teva and Ferrer Partner Teva Pharmaceuticals Grupo Ferrer Territories covered US Up-front Revenue payment terms $40m Tiered royalties, in addition to manufacturing revenues (at least equal to Alexza's COGS) Europe, Latin $10m America, Russia, and Commonwealth of Independent States countries Per-unit transfer price Potential milestones Up to $195m based on net sales targets and results of post-approval studies Up to $51m based upon commercial launch in nine pre-specified countries (already received $3m for MAA approval, and $1.25m for July 2013 Germany launch) and cumulative sales milestones Post-marketing commitments Teva responsible for all regulatory commitments (including a 10,000 patient observational safety study, and a clinical programme assessing drug's safety and efficacy in agitated adolescents) Launch strategy FDA approval Dec 2012 and launch expected Q413. Teva committed to at least a 40 sales rep-equivalent sales team targeting ~1,000 hospitals (where majority of emergency agitation cases occur) Alexza responsible for specific EU EU approval Feb 2013 and post-approval commitments launched in Germany in (including benzodiazepine July 2013; Expected to interaction study, cardiac rhythm launch in Austria in H213 or QTc study, observational study, and in other large EU and drug utilisation study). Ferrer markets (eg UK, France, Spain) in 2014 is responsible for all other regulatory and commercial requirements Source: Alexza SEC filings Adasuve financial model Our revenue projections are as follows: we assume 2m cases of agitation present to hospital or psychiatric ER departments per year in the US, and that 75% of these cases would represent the potential treatment market for Adasuve as we forecast 10% of presenting patients are too severely agitated and/or not sufficiently cooperative to use Adasuve, and that 15% of patients will have a pulmonary disease that would contraindicate them from taking Adasuve. We estimate that on average, a presenting patient would receive four doses of an anti-agitation treatment during their stay at a facility (some patients can be discharged in under 24 hours and only receive one or two doses, while others may be admitted for a week or longer); this brings the target US market at c 6m doses per year. We believe Adasuve’s rapid speed to effect will make it a lead drug of choice for initial presentations of agitation (in BPI and schizophrenia), but we assume that the majority of subsequent doses that may be required in inpatient settings (ie after admission to a psychiatric ward) will more often be adequately managed by lower-costing oral drugs (although on occasion, admitted patients who are poorly managed or who experience unpredictable exacerbations will require fast-acting therapy and Adasuve may be used in such cases). Hence we assume peak market US share of 20% for Adasuve starting in 2018 (see Exhibit 10). Alexza Pharmaceuticals | 27 August 2013 10 Exhibit 10: Financial forecasts for Adasuve sales in agitation associated with schizophrenia or bipolar disorder US market Total emergency visits involving patients with agitation (000) Addressable treatment population Treatable events per patient Addressable target market in doses per year (000) Adasuve market share Adasuve unit sales (000) Adasuve net price/unit (US$) Net Adasuve sales (US$’000) Net royalties to Alexza Royalty rate from Teva (%) EU market Total emergency visits involving patients with agitation (000) Addressable treatment population Treatable events per patient Addressable target market in doses per year (000) Adasuve market share Adasuve unit sales (000) Adasuve net price/unit (US$) Net Adasuve sales (US$’000) Transfer revenues to Alexza (US$’000) from Ferrer Transfer revenues net of supply costs (US$’000) Net revenue transfer payment rate from Ferrer (%) 2013 2014 2015 2016 2017 2018 2019 2020 2,000 75% 4 6,000 0.0% N/A 0 N/A 2,019 75% 4 6,057 2.7% 165 80.00 13,175 1,660 13% 2,038 75% 4 6,115 7.8% 479 84.00 40,199 5,789 14% 2,058 75% 4 6,173 13.0% 803 88.20 70,824 10,836 15% 2,077 75% 4 6,232 18.1% 1,130 92.61 104,691 17,464 17% 2,097 75% 4 6,292 19.9% 1,254 97.24 121,924 21,946 18% 2,117 75% 4 6,352 19.9% 1,266 102.10 129,241 23,263 18% 2,137 75% 4 6,412 19.9% 1,278 107.21 136,997 24,659 18% 3,185 75% 4 9,554 0.4% 36 88.45 3,169 634 490 15% 3,197 75% 4 9,592 1.7% 166 66.46 11,036 2,207 1,543 14% 3,210 75% 4 9,631 4.7% 453 58.80 26,614 5,323 3,422 13% 3,223 75% 4 9,669 7.8% 755 61.74 46,641 9,328 6,240 13% 3,236 75% 4 9,708 10.9% 1,058 64.83 68,573 13,715 9,411 14% 3,249 75% 4 9,747 12.0% 1,167 68.07 79,437 15,887 11,121 14% 3,262 75% 4 9,786 12.0% 1,172 71.47 83,743 16,749 11,963 14% 3,275 75% 4 9,825 12.0% 1,176 75.05 88,282 17,656 12,864 15% Source: Edison Investment Research We assume an initial US price for Adasuve of $80/dose. The tiered royalty terms of the Teva arrangement have not been made public, but we model royalties starting at 13% and peaking at 18% at higher sales levels. The deal also calls for potential milestones of up to $195m, and we assume that up to $50m will be triggered before 2022. We model that Alexza’s transfer price from Ferrer will be c 20% of Ferrer’s net selling price (NSP) but netting out manufacturing costs, we assume the effective gross profit for Alexza will approximate c 12-14% of Ferrer’s NSP (modelled 8 over the long term at 70% of the US price ). While a patent term extension may extend the key Adasuve patents for an additional five years beyond 2022, and while its technology will be more complicated to reproduce (vs pill dosage forms), we model that generic erosion will start in 2023. Beyond Adasuve – Staccato targeting additional markets Adasuve approvals in the US/EU markets and the securing of capable licensing partners enables Alexza to develop the Staccato delivery technology for other therapeutic areas requiring rapid and consistent drug delivery and ease of administration. The Staccato system appears to be broadly applicable as Alexza has already screened >400 drugs, and ~200 have exhibited initial vaporisation feasibility using its Staccato system, which can deliver both water-soluble and water-insoluble drugs without the need for added excipients and additives (avoiding the potential for associated side effects). Alexza has already completed clinical studies showing effective rapid pharmacokinetics (PK) for AZ-002 (Staccato alprazolam), AZ-007 (Staccato zaleplon) and AZ-003 (Staccato fentanyl). AZ-002 under development for ARS While the AZ-007 and AZ-003 programmes are not presently active (due to a prioritisation of firm resources), Alexza is actively developing AZ-002 for acute repetitive seizures (ARS), or clusters of seizures occurring over a short time period. Epilepsy affects 2.3m patients in the US (US Centers for Disease Control and Prevention), and up to 180,000 can suffer from unpredictable breakthrough seizures despite taking anti-seizure medications (and may have between two and 12 ARS ‘cluster 8 While the initial price in Germany is €70, we expect the average selling price to decrease as Adasuve is introduced in other EU territories. Alexza Pharmaceuticals | 27 August 2013 11 attacks’ per year). Alprazolam is a generic benzodiazepine available in oral formulations approved for anxiety and panic disorders. While a Phase II proof-of-concept (POC) study for AZ-002 in panic 9 disorder did not meet its primary end points, it did demonstrate a solid safety profile, and earlier studies showed that the device provides rapid and effective drug PK with Tmax of two minutes. Benzodiazepines are currently the standard of care for ARS, although only IV and rectal gel formulations (such as Valeant’s Diastat, or diazepam rectal gel [DRG]) are approved for the condition. DRG and generic equivalents are the only ARS approved products that can be used outside healthcare settings. Despite its inconvenient mode of delivery, DRG has a quick time to therapeutic onset of about 15 minutes, although its Tmax of 1.5 hours suggests that a benzodiazepine product with more rapid PK could be more effective in preventing further seizures (the therapeutic rationale is that prolonged or recurring seizures persisting for >30 minutes can lead to injury). The proposed role for AZ-002 would be through its application (in or outside of healthcare settings) between seizure episodes shortly upon the onset an ARS attack (as patients are usually coherent and able to follow instructions between episodes) to prevent further seizure recurrences during the cluster attack. Alexza is planning a double-blinded Phase II POC study for AZ-002 in ARS to start in H213; we estimate the study will recruit 60-70 patients and the primary efficacy endpoint will be the number of seizures occurring over a 12-hour period vs placebo. Alexza is also seeking orphan drug status. A crowded ARS market Other firms are also developing more convenient rapid delivery (RD) dosage forms of benzodiazepines for ARS. Acorda Therapeutics is developing a 20mg diazepam nasal spray (DNS), which completed three PK studies, including a 24-patient ‘pivotal’ study reported in March 2013 showing that its 20mg DNS had comparable plasma bioavailability to 20mg DRG. Acorda plans to submit a 505(b)(2)-type New Drug Application (NDA) in H213, with potential FDA approval and commercial launch in 2014. A 505(b)(2) application is a fast-track development/approval process as existing efficacy and safety data from a listed product (in this case, DRG) can be referenced in the filing for approval. Upsher-Smith Laboratories is developing an intranasal midazolam for ARS, USL261, being studied in a 155-patient double-blind Phase III study, with results expected in H114 and potential product launch in H215 or 2016; USL261 has shown a Tmax of 10-15 minutes in PK 10 studies. Research has showed that intranasal midazolam compares favourably with DRG and IV 11 diazepam. Neurelis is developing NRL-1, an intranasal diazepam formulation, to start ‘pivotal’ PK studies in H214 and will take two years to complete before filing a 505(b)(2) NDA submission. Jazz Pharmaceuticals had studied an intranasal clonazepam spray (JZP-8) and even obtained orphan drug eligibility for it, but announced in mid-2011 that it was re-evaluating its programme. Buccal formulations of midazolam have also been used off-label for ARS (eg Buccolam, ViroPharma). AZ-002 market opportunity Prior to the introduction of generics in 2010, Diastat had US sales of ~$100m in 2010 (which fell to under $40m in 2012). Diastat sells for ~$300 per administration vs ~$160 for generic DRG and hence we estimate that pricing for the initial inhalable benzodiazepine will lie somewhere in between. Given the inconvenience associated with DRG’s mode of administration, more convenient benzodiazepine dosage forms could increase the size of the market, as there should be less reluctance for product use among adult and adolescent patients. We assume that if the AZ-002 POC study is successful, Alexza could start a Phase III study in H214 (expected cost of $10-15m), potentially leading to a 2017 launch. As the market may become more crowded with other RD forms 9 To our knowledge, no benzodiazepines have ever met the doxapram-induced panic attack endpoints used in the AZ-002 panic attack study; AZ-002 may remain viable for established benzodiazepine treatment areas. 10 Holsti M, et al. Arch Pediatr Adolesc Med. 2010 Aug; 164 (8): 747-53. 11 Lahat E, et al. BMJ 2000;321:83. Alexza Pharmaceuticals | 27 August 2013 12 of benzodiazepines, we assume that AZ-002’s market share will not exceed 20% (we define the US market as 150,000 ARS susceptible patients experiencing an average of five cluster seizures per year), although AZ-002 may differentiate itself by potentially providing a more rapid therapeutic response (ie as its Tmax is believed to be shorter than USL261 and Acorda’s candidate). Additional candidate expected to be announced in H114 Alexza plans to initiate active development of another Staccato candidate in H114 following an internal review of pipeline opportunities, which may include AZ-003 (eg for acute pain) or AZ-007 (eg for insomnia) or another candidate for a yet unspecified indication. Alexza has also developed a Staccato device permitting multiple drug dosing administrations. Alexza had also out-licensed preclinical-stage Staccato nicotine in 2010 to Royalty Pharma (previously Cypress Bioscience) and in January 2013 the parties amended the terms of their agreement such that if Royalty did not sell or license Staccato nicotine by end-2013, all rights would transfer back to Alexza. Valuation We value Alexza using a risk-adjusted net present value (rNPV) model, using a 12.5% cost of capital. Our valuation includes our revenue expectations for Adasuve across the US and Europe; launches in other territories would provide modest upside. We also include a consideration for AZ-002, but it only accounts for a minor proportion given that the compound has not shown POC efficacy in ARS yet and hence we only assign a 25% probability of success. Exhibit 11: Alexza Pharmaceuticals rNPV assumptions Product rNPV ($m) Status 80.5 4.5 85.0 Approved Phase II Adasuve (Agitation) AZ-002 (Acute repetitive seizures) Total product rNPV Probability of success 100% 25% Estimated Est peak US Global market Est max US Est peak WW launch year market share value ($m) royalty rate sales ($m) 2013 20% 1,100 18% $240m in 2022 2017 20% 470 25% $86m in 2023 Source: Edison Investment Research Our $85m rNPV calculation represents upside to Alexza’s EV of $43.2m, and equates to $6.77 per share including $32m net cash (Q213). Our assessment does not specifically value the Staccato platform technology, which we believe can be extended into other API and present additional valuecreation opportunities in acute treatment settings. As the firm extends its Staccato development pipeline in the coming quarters, these opportunities may provide further upside to our valuation. Sensitivities Alexza’s valuation is principally tied to the revenue prospects of Adasuve. Early signs of US drug adoption trends will be tracked via the pace of facilities registering for Adasuve REMS certification. Factors affecting Adasuve sales and Alexza’s operating performance and returns are shown below. Regulatory risk. If data from the post-marketing studies required as part of Adasuve’s US and EU approvals reveal further pulmonary safety concerns, restrictions on its commercialisation could arise through changes to its approved label, or a more burdensome REMS, or may even halt the approval of the product. Conversely, if favourable safety trends emerge, the REMS could be lessened, potentially furthering the reach of the product and expanding sales. Intellectual property. Alexza has an extensive intellectual property (IP) position, with over 185 US and international patents. The Staccato delivery technology is protected by composition patents valid through 2022 covering processes for the delivery of drug aerosols (with the potential for an additional patent term extension of up to five years). The FDA Orange Book references 12 patents for Adasuve, including a patent (expiring in 2022) covering compositions for delivery of a condensation aerosol Alexza Pharmaceuticals | 27 August 2013 13 comprising loxapine and the process for producing such an aerosol using the Staccato technology; compositions patents for AZ-002 expire in 2022. The terms cited above do not include the provisions for five years of additional patent term extension, which could also be granted by the FDA. Alexza also strives to retain internal control over the final manufacture and assembly of its Staccato-based product candidates, potentially enabling further IP protection by maintaining certain know-how and trade secrets in house, making replication of Staccato devices by third parties more challenging. Manufacturing and supplier risk. While Alexza completes Adasuve manufacturing at its Mountain View, California, facility, it relies on single source suppliers for the product’s components, including the printed circuit boards, the molded plastic airways and the heat packages (used to generate the rapid heating necessary for vaporizing drug compounds without degradation, and supplied via an exclusive supply relationship with Autoliv ASP). Any supply interruption from these parties would limit the firm’s ability to manufacture Adasuve and impede its commercial or regulatory activities. Reliance on commercial partners. Adasuve’s commercial success will hinge on the efforts and capabilities of Alexza’s marketing partners, Teva and Ferrer, in ensuring an optimal and effective commercialisation effort. Teva’s high upfront payment ($40m) signals a strong level of confidence in the drug and is an indirect acknowledgement of a commitment to sufficiently market the product (as would be necessary for it to re-coup its investment). However, Alexza has limited control over Teva’s timing for a US Adasuve launch, and delays to the current Q114 guidance are possible. Financing risk. We forecast Alexza to continue to run operating losses through 2015 as its R&D and operating expenses exceed the royalties and revenues generated from Adasuve commercial sales until the product’s penetration reaches a level (of c $100m in annual sales) to offset these costs. Alexza may require additional financing to support its operations until Adasuve sales reach a sufficient level to sustain its operations without external funding; we expect the firm to raise $10m in capital in 2015. However, if sales ramp up more slowly than expected or if R&D spending or postmarketing commitments exceed current expectations, the firm may need to raise further capital. Off-label usage or label extension to other indications. Our Adasuve forecasts only consider its usage in schizophrenia or BPI-associated agitation. However, antipsychotic drugs are frequently used in conditions for which they are not approved (eg benzodiazepines and oral drugs are not approved for agitation but are frequently used; ziprasidone is not approved but is also used for bipolar disorder agitation); hence, Adasuve could potentially eventually also be used off-label (eg in addiction, dementia or intoxication-related agitation). Longer term, Adasuve’s label could potentially be extended to allow the drug to reach the much broader outpatient market (eg ambulances or even patient-initiated agitation therapy), which would require a relaxing of the current REMS and likely additional clinical trials. This scenario could present significant upside to our financial forecasts but cannot be assumed at present. Financials Alexza finished Q213 (30 June 2013) with $32m in net cash has guided that its current cash on hand (and the exercise of the $25m Teva note) will fund its operations through Q314. While Teva is now responsible for funding the required US post-marketing studies and commercialisation-related obligations, we expect Alexza’s R&D costs to remain in the $20m/year range as it spends on AZ002 and other pipeline projects; Alexza must also fund the post-marketing Adasuve commitments for the EU (which we assume will cost $5m between H213 and end-2015). We assume that Alexza will reach profitability in FY16 and will need to raise c $10m in additional debt in 2015 sustain its operations until Adasuve revenues are sufficient to sustainably generate positive free cash flows. Following its purchase of Symphony Allegro in 2009, Alexza is obligated to make contingent cash payments to the former Allegro shareholders relating to the licensing or royalty commercial revenue derived from Adasuve and AZ-002; Allegro is entitled to 25% of the initial $100m of covered Alexza Pharmaceuticals | 27 August 2013 14 revenues received by Alexza (c 10% remains outstanding as of Q213), and to 10% of all amounts thereafter. Our normalised EPS estimates include the payments of these obligations to Allegro. Exhibit 12: Financial summary 2011 US GAAP 2012 US GAAP 2013e US GAAP 2014e US GAAP 2015e US GAAP 5,660 0 5,660 (10,580) (28,262) (33,182) (34,368) 0 (4,000) 0 (38,368) (2,163) (36,531) (40,531) 0 (36,531) (40,531) 4,070 0 4,070 (6,757) (21,849) (24,536) (28,872) 0 6,900 (5,000) (26,972) (1,006) (29,878) (27,978) 0 (34,878) (27,978) 46,456 (3,104) 43,351 (11,572) (21,818) 9,961 6,774 0 (32,400) (10,127) (35,752) (315) 6,459 (36,068) 0 (3,668) (36,068) 8,452 (1,323) 7,129 (7,772) (18,400) (19,043) (21,744) 0 0 (1,106) (22,850) 99 (21,645) (22,752) 0 (22,752) (22,752) 21,877 (3,911) 17,966 (7,315) (16,482) (5,831) (8,108) 0 0 (2,691) (10,798) (293) (8,401) (11,092) 0 (11,092) (11,092) 6.8 (5.38) (5.38) (5.97) 0.0 12.5 (2.80) (2.80) (2.24) 0.0 16.7 (0.22) (0.22) (2.16) 0.0 17.6 (1.29) (1.29) (1.29) 0.0 18.0 (0.62) (0.62) (0.62) 0.0 BALANCE SHEET Fixed Assets Intangible Assets Tangible Assets Investments (new ABCP Notes) Current Assets Short-term investments Debtors Cash Other Current Liabilities Creditors Short term borrowings Long Term Liabilities Long term borrowings Other long term liabilities Net Assets 21,053 0 21,053 0 27,552 2,001 0 14,902 10,649 (34,948) (22,668) (12,280) (23,349) 0 (23,349) (9,692) 16,933 0 16,933 0 23,618 5,051 0 17,715 852 (18,718) (12,257) (6,461) (19,260) 0 (19,260) 2,573 17,386 0 17,386 0 20,647 9,148 0 8,269 3,231 (13,993) (10,765) (3,228) (49,198) 0 (49,198) (25,158) 15,085 0 15,085 0 24,704 9,148 0 11,159 4,398 (14,002) (10,774) (3,228) (72,013) (25,000) (47,013) (46,225) 13,248 0 13,248 0 25,209 9,148 0 8,050 8,011 (12,043) (8,815) (3,228) (82,013) (35,000) (47,013) (55,599) CASH FLOW Operating Cash Flow Net Interest Tax Capex Acquisitions/disposals Financing Dividends Other Net Cash Flow Opening net debt/(cash) HP finance leases initiated Other Closing net debt/(cash) (32,263) (2,163) 0 (496) 0 16,145 0 0 (18,777) (23,252) 0 148 (4,623) (22,235) (1,006) 0 (27) 0 35,242 0 0 11,974 (4,623) 0 (292) (16,305) (7,055) (315) 0 (1,090) 0 6,414 0 0 (2,046) (16,305) 0 (70) (14,189) (21,809) 99 0 (400) 0 0 0 0 (22,110) (14,189) 0 0 7,921 (12,376) (293) 0 (440) 0 0 0 0 (13,109) 7,921 0 0 21,030 31-December PROFIT & LOSS Revenue Cost of Sales Gross Profit General & Administrative Research & Development EBITDA Operating Profit (before except.and Allegro payouts) Intangible Amortisation Exceptionals Other including payouts to Symphony Allegro Operating Profit Net Interest Profit Before Tax (norm) Profit Before Tax (FRS 3) Tax Profit After Tax (norm) Profit After Tax (FRS 3) Average Number of Shares Outstanding (m) EPS - normalised (US$) EPS - normalised and fully diluted (US$) EPS - (IFRS) (US$) Dividend per share (p) US$000 Source: Edison Investment Research, company accounts. Notes: Contingent payments to Symphony Allegro Holdings are in operating cash flows. Our 2013 revenue forecasts include the exceptional one-time $40m up-front payment received from Teva. The exceptional $32.4m expense in 2013 refers to Alexza’s revaluation of the present value of its future potential liabilities to Symphony Allegro following the signing of the Teva deal. Our debt forecasts assume that Alexza will exercise the $25m debt facility provided by Teva in 2014, and that Alexza will raise an additional $10m in debt in 2015. Alexza Pharmaceuticals | 27 August 2013 15 Contact details Revenue by geography 2091 Stierlin Court Mountain View, CA 94043 US +1- 650-944-7000 www.alexza.com N/A CAGR metrics Profitability metrics Balance sheet metrics Sensitivities evaluation EPS 2011-15e N/A ROCE 14e N/A Gearing YY N/A Litigation/regulatory EPS 2013-15e N/A Avg ROCE 2011-15e N/A Interest cover YY N/A Pensions EBITDA 2011-15e N/A ROE 14e N/A CA/CL YY N/A Currency EBITDA 2013-15e N/A Gross margin 14e N/A Stock overhang N/A Debtor days YY N/A Interest rates N/A Creditor days YY N/A Oil/commodity prices Sales 2011-15e 40.2% Operating margin 14e Sales 2013-15e N/A Gr mgn / Op mgn 14e 84.3% Stock days YY Management team Chief Executive Officer: Thomas King Chief Financial Officer: Mark Oki Thomas King has been chief executive officer since June 2003. From September 2002 to April 2003, Mr King served as chief executive officer of Cognetix, a biopharmaceutical development company. From January 1994 to February 2001, Mr King held various senior executive positions, at Anesta, a publicly traded pharmaceutical company, including chief executive officer from January 1997 to October 2000, and was a member of the board of directors until it was acquired by Cephalon. Mark Oki has been chief financial officer since July 2012, principal accounting officer since May 2010 and principal financial officer since December 2011. Mr Oki was VP, finance and controller from February 2010 to July 2012, and controller from April 2006 to February 2010. From June 2001 to April 2006, Mr Oki was controller of Pharmacyclics. From 1998 to 2001, Mr Oki held several positions, including assistant controller at Incyte. From 1992 to 1997, Mr Oki held several positions at Deloitte & Touche. Chief Scientific Officer: James Cassella, PhD SVP, Operations and Manufacturing: Michael Simms James Cassella has been chief scientific officer and EVP of R&D since July 2012, having previously been SVP, R&D from June 2004 to July 2012. From April 1989 to April 2004, Dr Cassella held various management positions at Neurogen, a publicly traded biotechnology company, including SVP, clinical research and development from January 2003 to June 2004. Prior to Neurogen, Dr Cassella was assistant professor of Neuroscience at Oberlin College. Michael Simms has been SVP, operations and manufacturing since December 2011, and previously SVP, operations and quality from December 2009 to December 2011, and SVP, operations and manufacturing from February 2008 to December 2009. From May 2007 to February 2008, Mr Simms was SVP, manufacturing operations and from June 2004 to May 2007 VP, manufacturing, at Nektar Therapeutics. 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Berlin +49 (0)30 2088 9525 Friedrichstrasse 95 Alexza Pharmaceuticals 10117 Berlin Germany London +44 (0)20 3077 5700 Holborn 2013 |280 27High August London, WC1V 7EE United Kingdom New York +1 646 653 7026 245 Park Avenue, 39th Floor 10167, New York US Sydney +61 (0)2 9258 1162 Level 33, Australia Square 264 George St, Sydney NSW 2000, Australia Wellington +64 (0)4 8948 555 Level 15, 171 Featherston St Wellington 6011 New Zealand 16