Event - Milestones from Exalgo approval will boost CombinatoRx's fortunes

Analysis

If anybody is cheering for a quick and painless approval of extended-release opioid Exalgo (hydromorphone hydrochloride), it has to be the former owners of Neuromed, the privately held company that held the rights to the drug and merged into CombinatoRx. Approval of the chronic pain medication, with an upcoming PDUFA date of February 22, guarantees that the pre-merger owners of Neuromed will own 60% of the shares in the combined company, a proportion that will decline should the approval process drag on (CombinatoRx finds that reversing is the way forward,July 3, 2009).

Given the tough attitude the FDA has taken towards pain medications and their potential for abuse, further delays are within the realm of possibility, even probability. The approval date has already been delayed since November 22, with the company stating that the agency needed more time to review the application. But the market and analysts are taking the view that approval is the most likely outcome, and with it, a $30m milestone payment from Mallinckrodt, the Covidien subsidiary that will commercialise the drug.

Note: on February 16, 2010, CombinatoRx announced that the FDA has extended Exalgo's PDUFA to March 1, 2010 due to recent weather-related closure of the FDA's offices.

Product Exalgo
Company CombinatoRx
Market cap $63m
Product NPV n/a
% of market cap n/a
Event type PDUFA date
Date February 22, 2009

For a company with $20m in cash as of September 30, 2009, an extra $30m - an amount that could potentially rise to $40m, according to CombinatoRx - would come in handy. Its reverse merger with Neuromed in 2009 in part was designed to give the company enough cash to survive to 2012, shortly after it had been forced to sack two-thirds of its workforce and cut its R&D budget. Additionally, with nothing on the market and eight other candidates in the pipeline, a new infusion of cash may well make the difference between getting those products to market and an intellectual property fire sale for CombinatoRx.

On January 6, the company announced a management shake up, with Mark Corrigan, former head of R&D with Sepracor and a CombinatoRx board member, being installed as chief executive over former Neuromed president and CEO Christopher Gallen, who will now serve as CombinatoRx's executive vice president of R&D. Former CombinatoRx interim president and CEO Robert Forrester, who had been named chief operating officer of the combined company, has left.

Lingering concerns

An FDA approval is by no means a done deal. The FDA is sensitive about opioid abuse and addiction and is putting up ever-higher hurdles to their use, although the agency emphasises that it approved two new opioid drugs in July and August of 2009, Onsolis and Embeda. The agency has sought risk evaluation and mitigation strategies from the makers of all extended-release opioid medications to reduce abuse and addiction, which the FDA has already endorsed for Exalgo.

The former owners of Neuromed, which licensed the candidate from Alza in 2008 for $30m upfront, excluding milestones and royalties, are probably ruing the tough FDA attitude. Had the agency come through with approval in November, it would have triggered a merger clause that granted them 70% of the shares in the combined company, the deadline for which was December 31, 2009. Between January 1 and September 30, 2010, the Neuromed owners get 60%, a proportion that drops to 40% through December 31, 2010 and 30% if it drags into 2011.

The betting among analysts and the market is in favour of approval. On Exalgo’s side is that an identical formula called Jurnista is already marketed in the European Union by Janssen-Cilag.

Analysts covering partner Covidien asserted that the delay until February 22 was more related to process than to the content of the Exalgo NDA. Those analysts estimate peak sales for the drug of $150m. Meanwhile, CombinatoRx's shares have gained 50% so far this year, from a relatively low base, suggesting optimism for approval, while the short position in the stock was less than 1% as of January 15.

Whilst an approval is increasingly likely, Exalgo is going to be subject to greater scrutiny by regulators who want to limit the public health damage of opioid abuse. Therefore, there still may be some surprises in its path to the market, surprises that could mortally damage CombinatoRx.

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