It may be tempting to pick up some Egalet Corporation (EGLT) stock now that the price has dropped over 75% in the last year, but be wary of catching knives which may still be falling. Much of Egalets apparent value is reliant on its Guardian Technology proving itself as a credible abuse-deterrent technology. Egalet stock should remain stagnant in the near future, and I advise to keep an eye on it and re-evaluate in mid-to-late 2018.

Opioid abuse, including the prescription drugs oxycodone, hydrocodone, and others, has risen exponentially in the last decade. Drug overdoses were the leading cause of accidental death in the United States in 2015, with prescription opioid deaths making up roughly 40% of these. As the problem grows worse, more and more companies are creating abuse-deterrent technology platforms to attempt to curb the epidemic. Egalet Corporation is focused on developing abuse-deterrent formulations of opioids using its proprietary Guardian Technology. The Guardian Technology platform is designed to make pills more resistant to physical and chemical manipulation, but Egalet's first approved product utilizing Guardian Technology, Arymo ER, did not receive all abuse-deterrent designations for which they were hoping. This could lead to a very slow stock price recovery for Egalet as much of their pipeline is reliant on Guardian Technology, which now seems like it will not be able to stand out in a crowded market.

The companys stock has been decimated in the last year due to labeling problems of its most recently approved drug, Arymo ER. Though gaining FDA approval of Arymo ER early this year, Egalet was not able to secure the coveted intranasal or oral abuse-deterrent labels. The FDA has been fairly relaxed regarding Arymo ER abuse-deterrent marketing material, but the only abuse-deterrent label granted was deterrence against intravenous use. The FDAs relaxed oversight of marketing material may be indicative of anything helps attitude in the fight against opioid abuse. While this may help Egalet market Arymo ER, there are still many problems associated with marketing a similar product in a crowded market.

Egalet has two other approved products which it is currently marketing, SPRIX Nasal Spray and Oxyado. SPRIX nasal spray is an NSAID (Nonsteroidal Anti-Inflammatory Drug) targeted at short-term (up to 5 days) pain management for moderate to severe pain which requires analgesia at the opioid level. SPRIX, which accounts for ~75% of Egalets sale, may face competition beginning in 2018 from generics as its patent protection runs out. The other approved product, Oxyado, is an IR oxycodone pill aimed designed to discourage against nasal and intravenous abuse. Egalet recently submitted approval for higher dose Oxyado (10 mg and 15 mg) which could help boost sales in 2H17. Revenues have been growing steadily for these two products, seeing double digit percentage growth quarter over quarter for the past year.

Guardian Technology is Egalets proprietary technology used to create abuse-deterrent forms of opioid pills. Apart from SPRIX nasal spray and Oxyado, all Egalets approved and pipeline products rely on Guardian Technology being accepted by the healthcare field as a viable abuse-deterrent technology. Guardian Technology takes advantage of injection molding a polymer matrix to create a physically hard and difficult to manipulate pill. The technology also resists chemical manipulation and API extraction by turning into a viscous hydrogel on contact with liquids. This allowed Arymo ER to secure an intravenous abuse-deterrent label.

It is important to note that Guardian Technology does not actually alter the API of the drug, but is a way to make it more difficult to abuse. The problem with Arymo ER and other abuse deterrent opioids on the market is that they are not effective in deterring against the most common way prescription opioids are abused orally.

During a recent conversation I had with an abuse counselor, he described drug addicts as some of the smartest, most clever people he knew. This conversation got me thinking about the innovation needed to curb the opioid abuse crisis in the United States. Yes, Guardian Technology will make it more difficult for patients to misuse prescription drugs. Yes, Guardian Technology is a step in the right direction. No, Guardian Technology should not be considered a game-changer in the fight against oral and nasal opioid abuse.

Figure 1. Orange Arrows Represent Use of Guardian Technology.

To make matters worse, the abuse-deterrent opioid market is crowded and growing more crowded rapidly. Many of the players in this field utilize abuse-deterrent mechanisms very similar to Egalets Guardian Technology (MorphaBond ER, RoxyBond, etc.). Arymo ER only securing the intravenous abuse-deterrent label greatly hindered its chance to set itself apart from the other players in the market. The FDAs comprehensive action plan to reduce opioid misuse and abuse has a provision to expand abuse-deterrent formulations (ADFSs) to discourage abuse - which should encourage even more players to enter the market.

While the fundamentals arent looking great, Egalets technical indicators imply a bounce may be coming soon. The Relative Strength Index (RSI) has been hovering in the low 30s for the last few weeks indicating oversold, and the Moving Average Convergence Divergence (MACD) seems to be crossing the signal line, indicating potential bullish momentum.

Financially speaking, Egalet is in a decent position. Net Product sales increased from $2.5 million in 1Q16 to $5.5 million in 1Q17 while net loss increased from $18.5 million to $25.4 million in the same timeframe. Arymo ER sales may rely heavily on how well product is marketed. The company has a relatively high cash burn rate, but management has expressed confidence the company has enough cash, cash equivalents, and marketable securities to last until at least June 30, 2018. The company will continue to have a high cash burn rate for the foreseeable future as it continues R&D and marketing efforts.

This stock may be a buy if you are looking to sell on any bounce in stock price. Shorting does not seem logical at this point due to the stock losing ~75% of value in under a year, but may be a good move on a substantial bounce. Overall, the risk/reward is currently not in a good enough place to establish a position either way. I would suggest keeping an eye on this ticker and establishing a contrarian position on any big move either way. Short-term, this stock may be a good buy due to a possible technical bounce.

Yes, Guardian Technology discourages abuse by making the API less accessible and more difficult to alter, but to what extent? Egalet and their proprietary Guardian Technology are obviously improvements over the large number of opioids being prescribed with no abuse-deterrent properties whatsoever. The problem is whether Guardian Technology is a game-changing innovation or small step in the right direction which could soon be overshadowed by innovations of other companies. I lean toward the latter due to the fight against opioid abuse epidemic being such a potentially profitable market. Long-term, I do not believe Egalets Guardian Technology to be the solution for the opioid crisis taking place.

Overall, while Egalet Corporation may seem like a good buy at the current price, there is still room for further falling and the possibility the company may never be profitable. The long road to profitability for Egalet, coupled with the fact Guardian Technology is not a particularly game-changing technology, leads me to recommend avoiding this stock for now. There are better places to put your money which offer a much better risk/reward ratio. If you do feel the urge to invest in this company, I would encourage you to wait until at least August 9th to better evaluate after the conference call and Arymo ER sales data.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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Egalet's Guardian Technology Begins Fight Against Opioid Abuse Epidemic - Seeking Alpha