Zogenix (ZGNX) has a high chance of approval, but regulatory obstacles still exist.

Quick Diligence: While Zogenix has a high chance of approval, regulatory obstacles still exist.

As a team we've been close to Zogenix (ZGNX) previously. We agree there is a high likelihood of approval this time around, however, the fact remains that this company has struggled mightily with the regulatory process for Fintepla: they received an FDA rejection last year, and even this time around were hit in February with a request for additional information from the FDA. Given this poor execution track record and the lead time that has ceded to GW Pharma with Epidiolex, we are pessimistic that Fintepla will live up to the potential we once saw in the product (the pivotal data are quite strong, potentially even better than Epidiolex in Dravet though similar in LGS). Their late entry to the market, poor track record for execution, and the historical baggage for the active molecule in Fintepla (fenfluramine, previously marketed for obesity prior to being pulled from the market due to cardiotoxicity) lead us to believe ZGNX will play second fiddle to GWPH commercially and clinically. It's also important to note that this PDUFA date is for Dravet alone, so even if approved they'll have fewer indications than Epidiolex on its label for the time being. There is certainly upside in the stock and, without doing a full diligence, we would still expect Fintepla to do ~$500M in peak sales. However, Epidiolex is well on its way to consolidating its lead as the agent of choice in rare refractory epilepsies. Moreover, we would expect Epidiolex to be better positioned to expand into larger epilepsy indications given Fintepla will likely require continued cardiac monitoring given the historical issues with fenfluramine. At ZGNX's current <$30 price there is definite rationale to pick it up and expect a nice run up around FDA approval, but we wouldn't hang around too much longer beyond that given the competitive landscape and track record for poor execution.

Follow-up Question: Do you think there is decent upside in GWPH these days?

I also just saw that Sanofi is liquidating it’s 11bn stake in Regeneron. How does this typically effect the share price for the company regaining greater ownership stake? I believe SNY is planning on selling a lot of their shares back to REGN. More importantly, I’m curious about what small-/mid- cap companies SNY has their eyes on... I’m guessing this means some acquisitions are likely.

Follow-up Answer:

For GWPH, its a solid company that is probably close to properly valued by the market based on Epidiolex (peak sales around 1 - 2 B, market cap today sits around 4 B). Upside depends on the extent to which we get closer to $2B+ from indication expansions: first test of that is a July 31st PDUFA date for TSC. Full disclosure, I do own the stock myself (separate from WX Capital).

For everyone's context, Sanofi is liquidating ~$12B in REGN stock (originally acquired in 2015 as part of a collaboration agreement between the two companies). It expects to sell all but 400k of its 23.3M shares via a secondary offering and a $5B stock buyback by REGN. As the deal incrementally lowers REGN's cost of capital and also reduces REGN's share count by LSD, we'd expect shares to trade slightly positive over the next couple days (they're up ~1% vs. the XBI down ~1% today, if that's any indication).

Fundamentally, this shouldn't really change anything about REGN. This sale is coming earlier than the original Dec 2020 lockup expiry date of the original agreement, so this removes a bit of an overhang on REGN stock, but otherwise the two companies will still collaborate on R&D.

As for what Sanofi does with the money..the natural place to jump to is M&A, though we're likely not going to have the proper insight to take advantage of that (always fun to speculate though).

Just to close the loop on GWPH, there is still upside here even after the recent run up, but I would think about it as a longer term play- we could get some inflection points from the TSC approval, but might see some drag on 2020 sales due to COVID (physicians might not be as comfortable initiating new therapies via telemedicine). Their pipeline has some potential but nothing that looks like another epidiolex at the moment.