CAPScall of the Week: Zogenix


For years, satirical late-night TV host Stephen Colbert has been running a series on his show called "Better Know a District," which highlights one of the 435 U.S. congressional districts and its representative. While I am no Stephen Colbert, I am brutally inquisitive when it comes to the 5,000-plus listed companies on the U.S. stock exchanges.

That's why I've made it a weekly tradition to examine one seldom-followed company within the Motley Fool CAPS database, and make a CAPScall of outperform or underperform on that company.

For this week's round of "Better Know a Stock," I'm going to take a closer look at Zogenix .

What Zogenix does
Zogenix is a pharmaceutical company focused on developing therapies to treat central nervous disorders and moderate-to-severe chronic pain management. It has one FDA-approved therapy, known as Sumavel DosePro, which is a needleless, subcutaneous, self-injection device used to treat migraines that's co-promoted with Covidien . Other products in its pipeline include Zohydro ER, a non-acetaminophen-based drug for moderate-to-severe chronic pain management, and Relday, an early stage once-a-month subcutaneous injection of risperidone for the treatment of schizophrenia.

In January, Zogenix announced its preliminary fourth-quarter results which highlighted $13.5 million in product sales on 145,200 DosePro units shipped, a 26% increase from the year-ago period. Total yearly revenue equaled $36 million to $37 million, below management's previous guidance of $37 million. A full year-end report is due out in early March.

Whom it competes against
Because Zogenix has two primary areas of focus -- migraine medication and chronic pain management -- it has two separate groups of competitors to deal with.

In migraine medication, Zogenix's the Sumavel DosePro's primary competitor will now be NuPathe's Zecuity which was approved by the FDA in January. Zecuity delivers sumatriptin and a long-acting migraine medication subcutaneously via electronic pulses in a wearable patch to give migraine suffers relief. You'd think a non-needle system would be preferred over standard injectable medication, but Zogenix's Sumavel DosePro sales (while they appear robust) have been a bit disappointing. Perhaps Zogenix's marketing partnership with Covidien, which is just a few months old, will help boost sales, but only time will tell.

In chronic pain management, Zogenix will deal with a number of competitors, as well as a very strict Food and Drug Administration. The allure of Zohydro ER is that it utilizes hydrocodone without acetaminophen, a drug that can cause liver toxicity if used over the long term. The hope for Zogenix is that its medication will eventually replace shorter-acting drugs like Vicodin, which was formulated and developed by AbbVie but has since come off patent and is now sold considerably cheaper by generic producers. Standing in the way of Zogenix's success is the FDA's panel, which voted overwhelmingly against recommending Zohydro ER based on patient abuse concerns (11-2, with one abstention). Just as I highlighted last week, companies like Acura Pharmaceuticals are waiting in the wings with drug-abuse-resistant technology that may make standard pain management drugs obsolete in due time. Acura's next-generation nasal decongestant formulation, known as Nexafed and modeled after Sudafed, could be just the beginning of a drug-abuse resistant revolution.

The call
After carefully reviewing Zogenix, I've decided to make a CAPScall of underperform on the company.

Zogenix shares shot through the roof last week after the FDA delayed its PDUFA decision and it was announced that the looming decision would be brief at best. Some on the Street have speculated that this means an approval may be headed Zogenix's way for Zohydro ER. As for me, I'm more skeptical that the FDA will go against the recommendation of the FDA panel, especially with their long-standing track record of turning down easily abused drugs. Even if Zohydro ER does gain approval, I feel that low-priced generics will crush its market opportunity, or, worse yet, the FDA may place restrictions of usage of the drug based on its addictive nature.

In addition, I can't say I'm thoroughly impressed with Sumavel DosePro's sales thus far. The company partnered up with Covidien's experienced sales staff recently, so that may cause me to eat my words, but growth in its needless subcutaneous injection is nowhere near what would be required to get Zogenix anywhere near profitability. According to Zogenix's preliminary fourth-quarter results, it also only has $41.2 million in cash and cash equivalents remaining, with around $29 million in debt. That's a formula that screams out for a dilutive share offering in the future.

Does this pharma pipeline show promise?
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Fool contributor Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.Motley Fool newsletter services have recommended buying shares of Covidien. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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Originally published