FDA Issues Complete Response Letter on Intermezzo

On October 28, 2009, the U.S. FDA issued a complete response letter (CRL) on Transcept’s (TSPT) new drug application (NDA) for Intermezzo. The news has sent the shares down roughly 45%. TSPT is down now over 60% from the high following the stock’s 14% decline yesterday before the news was public (an obvious leak at the FDA).

The Good

The FDA stated that it believes Transcept has submitted substantial evidence of effectiveness for the use of Intermezzo in the as-needed treatment of insomnia characterized by difficulty returning to sleep after awakening in the middle of the night (MOTN).  The FDA also recognized that the Intermezzo data did not indicate significant next-day residual effects.

The Bad

The FDA requested additional data demonstrating that Intermezzo, when taken as directed in the middle of the night, would not present an unacceptable risk of residual effects, with particular reference to next-day driving ability. The FDA also indicated that the intended use of Intermezzo in the middle of the night represents a unique insomnia indication and dosing strategy for which safety has not been previously established.

Specifically, the FDA expressed two concerns regarding the possibility of patient dosing errors in the middle of the night that could lead to next-day residual effects. The FDA has asked Transcept to address methods to avoid:

  • Inadvertent dosing with less than four hours of bedtime remaining, and
  • Inadvertent re-dosing in a single night

Based upon the content of the letter, we believe that Transcept will need to conduct one or more additional safety studies to answer these questions. Transcept will request a face-to-face meeting with the FDA to discuss specific requirements for approval. We expect this meeting will take place in the next few months.

Specifically, a driving study will need to be conducted. We expect that management will begin the planning for this program immediately, but not actually initiate until after the company’s meeting with the FDA. The program will most likely enroll fewer than 60 patients and take 2-3 months to complete. This data could potentially be in hand by the second quarter 2010.

With respect to the dosing questions, we believe Transcept will attempt to quell these fears by improving the instructions for use (IFU) and the packaging for the product. The proposed packaging for Intermezzo included 3 blister-packs, each with 10 individually wrapped pills. Given the sublingual administration, Intermezzo is moisture sensitive, so each pill must be individually protected. One particular way to remind patients that they have already dosed a product in the middle of the night would be to leave the broken-off and unwrapped section of the pack by your bedside after dosing.

Specific label warnings to remind patients that they must be able to dedicate at least four hours to sleep after dosing will probably be bolded and enlarged on the outside box and inner packing. In the meantime, getting the face-to-face meeting with the FDA and receiving approval for the driving study protocol remain the rate-limiting steps. Once the data is re-filed, perhaps in the middle of 2010, we expect the FDA will act within six months, potentially putting re-action on Intermezzo in late 2010.

The ‘Not So’ Ugly

Despite the setback, Transcept still has an estimated $90+ million in cash on hand as of the end of the third quarter 2009. This is roughly $6.90 per share, about $1 above the current price. The driving study should be rather inexpensive to conduct — perhaps $1 million at most. Total burn over the next 4 – 5 quarters while we are waiting for the U.S. re-file and FDA approval should be minimal, perhaps $20 million.

So assuming we have a re-action on Intermezzo at year-end 2010, Transcept should still be sitting on an estimated $60 million in cash. The current market capitalization is only $75 million. This significantly under-values the company in our view, and we have yet to discuss the potential for Intermezzo outside the U.S.

Plus, Purdue has no ongoing costs associated with Intermezzo until approval, so fears that Purdue will walk away from the partnership are unjustified at this point. The $25 million upfront milestone has already been paid. Purdue is not going to sink $25 million into Transcept just to walk away after what looks to be about a 12 – 15 month delay. Until approval, Purdue just waits.

Plus, the approval milestone of $30 million is reduced by $2 million per month after June 30, 2010, so Purdue has baked protection into the terms of the agreement. Yes, the CRL is a frustrating one considering the details of the letter — Intermezzo works and is safe, but can you do a driving study and re-work the packaging? But the potential is still there and we remain optimistic on the eventual approval of the drug.
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