Small Caps | Apr 28 2014
-Severe setback to development
-Now highly speculative investment
By Eva Brocklehurst
QRxPharma ((QRX)) has been scalded. The advisory committee of the US Federal Drug Administration – the world's most influential health product regulator – has rejected an application for approval of the company's MoxDuo-IR drug. The grounds were lack of evidence of a safety advantage. As this is considered unproven, QRxPharma has to return to the clinic and repeat its phase 3 trial, using a design that specifically entails demonstrating a meaningful safety advantage.
The study will require a further two years and $50-75m, according to Citi. As the company has only $15m in cash, it will have to resort to a further capital raising, which will be diluting to existing shareholders. Moreover, the broker believes the company's credibility is now at stake, particularly as its own briefing documents for the FDA suggest there was a much less compelling case than had been purported. This could make further fund raising problematic, in the broker's view.
Citi acknowledges the FDA may have changed some of its requirements while the trials were in progress but thinks the company's ongoing protestations regarding the process are unhelpful. The broker cuts the price target to 27c from $2.58 but hangs onto the Buy rating, although noting there is significant risk and the stock is highly speculative. The lack of clarity on the path to regulatory approval is expected to weigh heavily for some time. Citi also assumes a further $80m in equity will be needed.
QRxPharma is a specialty pharmaceutical company developing new drugs to treat moderate to severe pain. The company has patented a combination of morphine and oxycodone and this forms the basis of its developmental drug products. Essentially, the company has not convinced the FDA that its product is safer than taking morphine or oxycodone on their own. MoxDuo-Immediate Release is the most advanced product while the company is also developing MoxDuo-Controlled Release and MoxDuo-Intravenous.
JP Morgan is equally perturbed and has downgraded the stock to Underweight from Neutral, cutting the target to 6c from 92c. The broker notes the US was to be a highlight in the company's geographical approvals and this is now a non event. The US has always represented one of the largest market opportunities and this rejection is the latest in a line of setbacks for the company since 2012, when it received the first complete response letter from the FDA, with a subsequent letter relating to data integrity issues in August last year.
Also, the rejection calls into question whether approvals in Australia, Europe and Canada and the launches in these jurisdictions targeted for 2015 will be achieved. JP Morgan is not ruling out the potential for the product to be approved elsewhere, given the obstacles tend to be fewer. Nonetheless, with the second half 2014 launch of the product in the US now delayed indefinitely the broker assumes no revenue will be forthcoming in FY15. JP Morgan includes contributions from Canada, Australia and the EU in FY16 estimates, in line with the targeted launch of the product in these regions, but risk weights these earnings to reflect a lower probability of approval.
The broker does point out that the FDA advisory committee considered the incorporation of anti-abuse technology would be a supportive factor in approving the pain drug and the company's Stealth Beadlet technology may hold that opportunity. QRxPharma intends to incorporate this into MoxDuo-IR, but this requires new trials and is some way off. Hence, the cash position is in focus and the broker observes the US partnership agreement with Actavis Watson, which was based on approval of MoxDuo-IR, is also now uncertain.
Morgans has moved the probability of success for MoxDuo-IR to 20% from 80% and removed a $20m milestone payment and related costs from valuation. The broker has maintained forecasts for the MoxDuo-CR and MoxDuo-IV programs at this stage but reduced market share assumptions. The share price target has been cut to 21c from $1.79 and the rating double downgraded to Reduce from Add. The FDA will make its final recommendation on May 25 but brokers consider it unlikely to go against the advisory panel's decision. To Morgans, the upshot is a key milestone has been missed and for many investors the stock is no longer appropriate for their portfolios.
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