Zogenix (ZGNX) in a press release Wednesday morning said that it is undertaking cost-control initiatives in order to achieve key business milestones in 2013, including: 1) efforts to gain FDA approval for Zohydro ERTM; 2) to secure a development partner for ReldayTM, its once-monthly injectable formulation of risperidone for schizophrenia; 3) and to out-license their DosePro needle-free delivery technology. The company is reducing its workforce by 37%, reducing operating expenses and capital expenditures, and will be increasing its focus on reaching profitability with Sumavel.
The initiatives underway are expected to extend the Company’s cash runway beyond the potential achievement of one or more of these milestones during the second half of 2013.
That could mean just about anything.
Recall that in early May Mr. King and Mr. Patel opined that Zohydro would not be approved given the FDA’s focus on abuse resistance and deterrence in analgesics. We continue to stand by that assertion, and today’s news raises new questions about Zogenix’s ability to remain solvent. Since our report, shares are down 14%.
Zogenix ended the first quarter with $25M in cash and equivalents. Today’s announced work force cuts, hinted at in an 8-K filed yesterday, will result in a $1M charge for severance costs. We estimate that since the cuts occurred 66% of the way through 2Q, and considering the $1M charge, cash burn this quarter will be roughly $11M ($15M last quarter). Zogenix will then end the second quarter with around $14M in cash, meaning the company will be flat broke unless it finds capital expeditiously.
Perhaps most telling is that Zohydro has not used a $25M At The Market facility that was put in place on March 27, even though the company is clearly closing in on dire straits in terms of cash needs. Simply put, we believe that Zogenix is having a difficult time finding large investors willing to gamble on what appears to be a questionable business (Zohydro’s approval, $34M in long-term liabilities.), and the announced cost-cutting is a result of this unsuccessful capital search, not avoidance of the raise. With that in mind, we believe there’s little reason to be involved in ZGNX, a short position aside. Read PropThink’s previous report for details.
Interestingly, the company says it’s “making encouraging progress towards securing a second product to co-promote with a goal of beginning sometime this summer.” Zogenix’s announced reduction in capital expenditures suggests that this will not be a major acquisition or in-licensing and likely references another DosePro product. Zogenix has one revenue-generating product, thus it’s difficult to imagine the company will go entirely belly up. But at a $147M valuation, the silver lining is hard to find. Dilution through its ATM or, we suspect, a discounted offering and extensive warrant coverage to attract large investors, seems like the most likely near-term outcome.