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ATXI Avenue Therapeutics, Inc. - Initiation Note

Avenue Therapeutics, Inc.

BUY (ATXI, $6.77)

IV Tramadol for Post-Operative Pain – Derisked Late Stage Development Combined with Low Abuse Potential, a Strong Positive Given the Current Opioid Epidemic: Initiating BUY/$15 TP

August 15, 2017

Jonathan Aschoff, Ph.D.

212.417.8277

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We are initiating coverage of Avenue Therapeutics, Inc. with a Buy rating and 12 month target price of $15. Avenue’s lead candidate, intravenous (IV) tramadol for post-operative pain, has already proven itself as effective for pain as an oral drug in the US and as an oral and IV ex-US. Avenue will begin its Phase 3 program for IV tramadol in 3Q17 and in light of the drug’s history, we view the remaining clinical development as being at the low end of risk spectrum.

We believe that late stage clinical development of IV tramadol is well timed given the current opioid epidemic in the US. While tramadol is an opioid, it is a weak opioid and as such it has a low enough abuse potential to be a DEA Schedule 4 drug, by contrast to Schedule 2 pain drugs such as morphine, hydromorphone, oxycodone, fentanyl. Tramadol alleviates pain through multiple means including weak mu-opioid receptor agonism, serotonin reuptake inhibition, and noradrenalin reuptake inhibition. This combination of effects should confer a commercial advantage to tramadol over more addictive, traditional opioids.

In the US, pain management related only to surgery represents a large market in excess of $1B. In 2015, there were about 32 million inpatient treatment days in the US when only considering IV opioids. In the same year, approximately 51 million US hospital reimbursement claims for injectable opioids were submitted, which included 16 million hospital inpatient stays and 35 million outpatient visits. To be conservative, despite the drug’s differentiated profile, we have only projected a 5% peak market penetration, and yet are still able to make a compelling investment rationale with only a $10 projected cost per dose.

When a patient is initially responding well to a given drug in a hospital setting, it is generally good practice to send them home with that same drug, a possibility in the US should IV tramadol receive FDA approval. Currently, tramadol is only approved in the US as an oral, but with an effective IV formulation, hospitals would have the ability to discharge a post-operative patient with pain medication they already know works for that patient, an arguably better approach than switching them to an entirely different drug with which the patient has no experience.

Avenue had about $34.7M in cash at the end of 2Q17, after a $38M initial public offering in 2Q17 that was almost entirely funded by National Securities Corp., sufficient to support its activities through at least 2018, by our projections.

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