Egalet (EGLT): The Guardian of Misuse and Abuse

By John Vandermosten, CFA


We are initiating coverage of Egalet Corp. (NASDAQ:EGLT) with a $6.00 price target based on our estimates for growth of three products currently being commercialized in the United States.  Egalet has developed a therapeutic focus on pain and differentiated itself in the space by embracing abuse deterrent technology, which we believe will make up an increasing portion of the $24  to $40  billion opioid pain relief market.  Initial penetration is promising with second quarter revenues up 81% over the prior year.  Several new relationships have been developed in 2017, including the addition of a payor with 24 million lives and Ascend Therapeutics, a leader in women’s care.  These partners are expected to help sustain high growth rates in coming quarters.  With a favorable regulatory and legislative environment, we anticipate continued penetration of abuse deterrent formulations (ADFs) that is expected to contribute to continued double digit growth for several quarters to come.  

The company currently has three products generating revenues, Arymo ER, Oxaydo, and Sprix nasal spray, all indicated for varying types of pain.  Arymo ER (morphine sulfate) is an extended release morphine product with abuse deterrent features intended for the management of severe pain requiring constant opioid treatment.  Oxaydo (oxycodone HCI, USP) is an immediate release (IR) oxycodone drug used to manage acute and chronic, moderate to severe pain also designed to discourage abuse via snorting.  Egalet’s largest current revenue generator, Sprix (ketorolac tromethamine) is a nonsteroidal anti-inflammatory drug (NSAID) indicated in adult patients for short term pain of no longer than five days.  

As of June 30, 2017, Egalet held approximately $87 million in cash on its balance sheet.  Following the end of the second quarter, the company conducted an equity offering to raise an additional $30 million.  During the release of second quarter results, Egalet announced a restructuring that will reduce expenses by 35% and increase the focus on revenue generating activities.  EGLT expects current cash levels to support the business until 2020, at which time we see the company as cash flow positive due to continued revenue growth from approved products.  

Based on the current products and anticipated sales trajectories, we see double digit growth over the next few years, driving revenues of over $100 million by 2020 at which time we also see first positive earnings.  Continued script growth for Arymo ER, Oxaydo and Sprix through additional relationship building will drive the eventual turn to profitability.  These products are in their early stages of commercialization and are entering markets of approximately $6 billion in sales, where we expect EGLT will gain a high single digit market share as abuse deterrence gains relevance.

Investment Thesis

Egalet Corporation has developed a focus on the treatment of pain with a further emphasis on abuse deterrence.  There are an estimated 100 million  persons suffering from chronic pain, 13 million ER and 196 million IR  opioid prescriptions written each year, but only an estimated low single digit penetration  of abuse deterrent formulations (ADFs).  This provides a substantial market opportunity for Egalet and its innovative and relevant products.  The incidence of abuse of controlled substances, especially opioids, has become an increasingly large epidemic in the United States and one avenue for addressing abuse is greater use of ADFs.  ADF products can deter abuse via the oral, nasal and intravenous route through the use of specific features that make improper use unpleasant or very difficult.  The company’s proprietary Guardian abuse deterrent technology offers an effective method of deterrence that makes crushing the pills difficult and conversion into liquid for injection challenging.  Currently, Egalet has two products that are currently approved with anti-abuse properties.  The company’s pipeline also includes other ADF products in various stages of development; however, the company’s focus is currently centered on products that are already generating sales.  The portfolio also includes a non-opioid, NSAID fast-acting spray for pain, which has opportunities in other specialties.  Growth is in the early stages for the company’s three approved products and we anticipate sharp topline increases over the next several years.

Key reasons to own EGLT shares:

➢ Differentiated participant in large opioid pain market 

➢ States and FDA encouraging use of ADF products

➢ Limited competition from other ADF manufacturers

➢ Guardian technology addresses oral, nasal and intravenous routes of abuse

➢ ADF technology counteracts alcohol-related dose dumping

➢ Market expansion opportunities both overseas and with other in-development products

➢ Opportunity for continued growth through partnerships with a focus on specialists

Our growth forecasts incorporate many of the positives listed above, however, there are additional opportunities that are not included in our forecasts.  Oxaydo was not approved under current ADF guidelines, which were promulgated following FDA approval.  However, Egalet will seek a meeting with the FDA to determine a path forward and seek approval of Oxaydo as an ADF.  If approved, this would leave the drug as the only marketed ADF in the immense IR oxycodone market.  Oxaydo is also seeking approval of two of the more popular dose strengths, which could have more demand than the current 5 and 7.5 mg doses currently being commercialized.  Sprix may have opportunity overseas that could begin with the current (but stalled) licensing with Teva.  If this partner is able to launch in its current licensed areas, the deal could expand to other international areas as well.

In the following sections we provide additional detail regarding Egalet’s products and pipeline and further elaborate on the size and scope of drug abuse addressed by the company’s portfolio of products.  The report also discusses Egalet’s strategy and manufacturing process for its suite of pain products.

Opioid Drug Abuse


Opioids are psychoactive chemicals originally derived from the opium poppy (Papaver somniferum) whose dried latex (sap) has been used for pain relief and as an anesthetic since ancient times.  More recently, synthetic and semi-synthetic versions such as hydrocodone, oxycodone and fentanyl dominate the market.  This class of drug has a variety of effects that are achieved through attaching to and activating opioid receptor proteins, which are found in the brain and other parts of the body.  The main effect sought by prescription opioids is pain relief when other classes of analgesics, such as nonsteroidal anti-inflammatory drugs or acetaminophen, are not appropriate or sufficient.  The analgesic effects are mediated mainly through the μ receptors’ release of substance P  in the spinal cord, the central neurotransmitter for pain, whereas euphoric effects involve the dopaminergic system which is involved in addictive behavior.  Opioids are used to treat both acute and chronic pain, such as that following a dental procedure or for fibromyalgia.  Despite its benefits, this class of drug can be addictive and can lead to misuse, abuse, addiction and death.


Diversion is the transfer of a prescription drug from an authorized patient to another channel for further sale or use.  According to research, half of people obtain prescription opioids from a friend or family member, with a higher proportion for casual users and a lower rate for heavy users.  One of the goals of deterring abuse is to limit diversion, which can be enhanced in the case where prescription drugs can be modified from their original form. 
Drugs that are easy to manipulate are more attractive diversion candidates as their active ingredient can be extracted to be used via alternative means, such as snorting or injection.  Abuse deterrent formulations, such as Egalet’s Guardian technology, make it difficult to use the medicine other than in the way it was intended, and can limit diversion.

Opioid Abuse

The incidence of opioid abuse in the United States has increased substantially over the last two decades and drug overdoses are now the leading cause of death in Americans under 50.  The American Society of Addiction Medicine estimates that there were over 33,000 opioid-related drug overdoses in 2015, up from just over 8,000 in 2000.  About 60% of all overdose deaths are attributable to opioids.  The 2015 National Survey on Drug Use and Health estimated that 12.5 million persons misused prescription opioids, highlighting an area where abuse deterrent formulations (ADF) can make a difference in solving the crisis.  

Prescription drugs can be misused in a number of ways.  Misuse broadly means that a prescription drug is being taken in a manner or at a dose other than which it was intended.  Misuse can mean taking someone else’s prescription, or taking a higher dose than prescribed.  The term also applies to a drug that is being taken to induce euphoria or for some other non-medical use.  There are three classes of drugs that are commonly misused, as listed below.  

Abuse Deterrence

Drug abuse is a substantial and growing problem in the United States and efforts to combat it must come from a variety of directions.  Some of these approaches include education addressing the hazards of drug abuse, the use of drug treatment programs, controls on abused substances, efforts to reduce the amount of opioids available and, increasingly, abuse deterrent formulations of commonly abused drugs.  This multi-pronged approach requires the efforts of governments, individuals and companies to successfully implement.  

The FDA is supportive of ADF technology because these products are expected to reduce abuse and diversion compared to non-ADF products.  In 2015, the agency released a draft guidance document entitled “Abuse-Deterrent Opioids: Evaluation and Labeling” which provided detail on how to evaluate ADFs for FDA review.  The FDA acknowledges that being classified as “abuse deterrent” does not mean the drug is abuse proof and that abuse deterrent features can be defeated.  However, the agency recognizes that ADFs do help especially when used in combination with complementary efforts and is encouraging further development of this class.  The FDA is willing to put resources behind its push and is funding efforts to evaluate several important aspects of ADFs including formulations and packaging.

Many states have passed laws that require insurers to place ADF options on their formularies.  So far, Maine, Maryland, Massachusetts, Florida and West Virginia have legislation mandating this change.  In these states, step therapy (fail first) is prohibited for ADFs and in Massachusetts, pharmacies must substitute ADFs for standard prescriptions.  Other states require the medications to be covered by insurers and limit cost sharing requirements for patients.  

One of the key government entities that is taking the lead in the efforts to address the opioid crisis is the President’s Commission on Combating Drug Addiction and the Opioid Crisis.  In an interim report released in late August 2017, the commission made several recommendations focused on treatment rather than prevention, and did not mention ADFs.  However, the commission continues its work and expects to provide an update in the fall.  Governor Charlie Baker of Massachusetts who sits on the commission may provide an opportunity for ADFs to become part of the group’s recommendations as his state passed favorable legislation related to ADFs during his administration.

Abuse Deterrent Formulations

Abuse deterrent formulations, or ADFs, serve to make it more difficult or less rewarding to intentionally use commonly abused drugs or substances to achieve a desired psychological or physiological effect.  Common routes of abuse include oral, nasal or intravenous.  There are several mechanisms of deterrence that are used to prevent abuse and misuse of potentially addictive drugs.  These mechanisms fall into three broad categories: 1) physical barrier, 2) chemical additives and 3) conversion of a molecular entity into a prodrug.  A physical barrier is a common ADF approach which formulates the drug into a structure that resists conversion into alternate forms, such as an excipient that does not permit crushing or dissolving for use in snorting and injection abuse.  

Chemical additives may employ an opioid antagonist, such as naloxone, that is added to the medicine so that it will counteract the opioid if the pill is crushed or altered.  Other approaches include adding an irritant which frequently include capsaicin or niacin, so that if crushed and snorted the pill residue will cause irritation to the users’ nasal passages.  However, chemical additives have some downsides if they impact efficacy in the case of neutralizing the active ingredient, cause withdrawal in abusers or the irritants cause gastrointestinal or other problems.

Other abuse deterrent pathways include transforming the active ingredient into a prodrug where it is inert until the body’s metabolism converts it into the active drug.  This approach is able to make intravenous injection or intranasal abuse less attractive.  Some companies are even developing opioid-based analgesics that provide significant pain relief but avoid the euphoria that leads to abuse and addiction. 

Guardian Technology

Egalet’s Guardian Technology employs a polymer matrix that is injection molded into a tablet which is difficult to crush, break, grind or liquefy.  These features create a durable deterrent to abuse, resisting attempts to chemically manipulate the tablet and extract the API to achieve euphoria.  The Guardian tablet is constructed of an inner matrix and an exposed shell.  The shell is made of the polymer matrix and the internal components will convert to a viscous hydrogel if exposed to a solvent.

An additional feature of Guardian technology is its ability to counteract dose dumping.  Dose dumping is a phenomenon brought about by the consumption of alcohol or food along with the prescribed medication, where the presence of alcohol or food accelerates the release of the drug substance resulting in an accelerated high for the user.  As a safeguard, Guardian employs specific polymers and excipients in order to produce a lower dissolution rate when exposed to alcohol as compared to when taking alone.

In June 2017, Egalet announced a new patent protecting its Guardian technology which advances the product’s ability to create immediate-, delayed- and/or extended-release tablets with precise drug delivery of one or two different active pharmaceutical ingredients.

Are Abuse Deterrent Formulations Needed? 

Opioid abuse is a tremendous problem in the United States and had become worse over the last decades.  Opioid based pain relief is an important element of pain control.  However, new abuse-deterrent opioids that are under patent have higher prices than the generic alternative that they replace.  With pressures from payors to keep costs down, does it make sense to expand the use of abuse deterrent formulations?

In an article published in the Journal of Medical Economics, additional costs associated with diagnosed opioid abuse was $9,500 per year for commercially insured patients and $11,500 for Medicare insured patients.  The article continued, describing an 18% reduction in abuse for Medicaid patients and a 23% reduction in abuse for managed care patients.   An article in Pain Medicine performed an analysis of cost savings based on a number of resources and found estimated cost savings of reformulated ER Oxycodone was over $1 billion.  The savings came from lower health care costs, improved work productivity, and lower criminal justice costs.   On a per person basis this is about $4,600 compared to incremental abuse deterrent drug costs of $600 to $2,800.  This analysis showed a benefit of $1,800 to $4,000 on a per person basis and does not take into account the benefits from avoiding addiction in the first place.  

A 2015 study  was performed by Theodore Cicero of Washington University on OxyContin, an abuse deterrent formulation of oxycodone hydrochloride.  The study found that the ADFs did cause users to change their behaviors.  Some shifted from injected or inhaled administration to oral, while others were able to overcome the abuse deterrent features and inject or inhale, while another group continued to swallow the pill.  The study found that a significant number of abusers stopped abusing OxyContin following the release of the ADF.  The abuse rate went from 45% of the high risk patient group 18 months prior to the ADF release to 26% three years after its release.  

Other, but less studied benefits of ADFs include the prevention of initial abuse and reduction of theft and trafficking of opioids.  Many individuals begin abusive behavior before addiction, through chewing or snorting.  If the abuse deterrent is sufficient to make this a difficult, unrewarding or unpleasant experience, abuse may stop before it even begins.  Abuse deterrent drugs are also less desirable than opioid-based alternatives that can be manipulated.  Anecdotal evidence shows lower values and less desirability for ADFs on the black market  represented by low availability and low price which reduces the incentive for theft and trafficking of opioids or other controlled substances.

Some industry reports have criticized ADFs noting that after a shift to an abuse deterrent formulation, abusers move to other prescription opioids.  However, this logic ignores the benefits as the penetration rate of ADFs increases from the single digit percentage market share it now occupies and fails to acknowledge that there is less supply and less opportunity for a drug to be abused.  According to a 2016 Survey 53% of opioids are taken from a friend or relative.   ADFs can help close this avenue of diversion which is more prevalent in the initial stages of abuse.  Based on the research included above, we believe ADFs do add value in the effort to address the opioid crisis.

Deaths from drug overdoses have increased over the last decades with the vast majority of them involving some type of opioid.  To address this issue the FDA has made the development of ADF products a high public health priority.  Several products, including those commercialized by Egalet, have made their way to market, and their abuse-deterrent qualities have been validated by the agency.  Several states have also passed legislation in support of ADF-validated alternatives.  Elected officials are also taking action with the president signing an executive order launching a commission to study the issue and promising to accelerate FDA approval of abuse-deterrent painkillers.


Egalet has a portfolio of opioid ADF and non-opioid analgesics which have broad appeal in the market and address a critical problem that the United States is facing today with opioid medications.  Both Arymo and Oxaydo have characteristics which are becoming an increasingly important part of the fight against opioid abuse and addiction.  Sprix is a fast-acting NSAID which can be an alternative to opioid based treatments.  Recent growth has been extremely high, although off of a small base.  To continue the fast uptake of their products, Egalet has developed relationships with dominant payors and other specialty groups such as Ascend Therapeutics and Septodont to improve reach and sales volume.

Both federal agencies and state governments have made efforts to increase the penetration of ADFs.  One of the most visible efforts to stem drug abuse is the Presidential Opioid Commission, which has not yet recognized ADFs as part of its recommended strategy; however, one of the commission members is governor of Massachusetts, which is at the forefront of legislation encouraging their use.  Egalet, along with other ADF manufacturers, has increased their education efforts with stakeholders in the government, insurance and provider spheres which we expect will help improve understanding of how ADFs can play a role in the coordinated approach to solving the opioid crisis.  

Egalet currently has three products that have been approved and launched and recently announced a restructuring that focuses the company’s resources on sales and commercialization of these products.  We anticipate that these cost reductions combined with the recent cash infusion and the topline growth trajectory will support the shift to operationally positive cash flow in 2019 and positive earnings in 2020.   

In summary, we see a portfolio of pain-focused products with a favorable regulatory environment supporting  continued topline growth over the near term.  Initial penetration for Arymo, and potential ADF status and additional strengths for Oxaydo as well as partnership opportunities with Sprix pose topline opportunities that could generate growth ahead of our forecasts.  Based on our view for each of the products, we initiate Egalet with a target price of $6.00.