Stock Opinion
Cadence Pharmaceuticals (CADX) achieved the dream of every emerging bio-pharmaceutical company when it received US approval for its first product Ofirmev on November 2, 2010; it was then launched on January 17, 2011. Ofirmev is an intravenous formulation of acetaminophen, which was licensed from Bristol-Myers Squibb (BMY). It has been marketed in Europe under the trade name Perfalgan by Bristol since 2002. In Europe, it is the market share leader for intravenous analgesics based on units sold.
The first response of investors upon hearing this is to say wait a minute, acetaminophen is the generic ingredient of Tylenol and a lot of other over the counter products and has been around forever. What is the importance of coming up with an intravenous formulation? The primary therapeutic need for Ofirmev is in the post-surgical setting when a patient is recovering from surgery and can not take pills. These patients are currently treated with opioid narcotics and to a lesser extent NSAIDs. Both of these classes of drugs have troublesome side effects and actually carry black box warnings. There is a significant medical need for a safe injectable analgesic and this is the role that Ofirmev will play in the hospital.
The next question is why hasn’t an intravenous formulation of acetaminophen been introduced before now? It has not been for lack of effort as there have been numerous attempts. However, until Ofirmev all attempts failed to create a stable, commercially viable formulation.
There is reason to believe that Ofirmev has significant sales potential in the US. Perfalgan has obtained 22% of the European intravenous analgesic market as measured by units. If Ofirmev achieves the same penetration in the US, it could reach peak sales of $600+ million. There is reason to believe that it could obtain a higher market share in the US.
The Ofirmev approval was announced after the close on November 2, 2010 when the stock closed at $8.97. The most recent close on March 10, 2011 was $8.79. The market has surprisingly given Cadence no reward for the approval. However, I should point out that Cadence raised $94 million in an equity offering that followed on the heels of product approval and this could have hindered performance.
It appears to me that more than half of the analysts covering Cadence are positive and the others are neutral or slightly negative. The more negative assessments are based on some of the following points:
- The hospital market requires that new products go through a rigorous formulary assessment that evaluates the need for the product and justifies its price before allowing it to be used in the hospital. This is a slow and painstaking process that Cadence must go through with each hospital. These reviews can take up to six to nine months. As a result, sales of Ofirmev will be small in 2011 ($25 million or so) as Cadence labors through the formulary acceptance process. Some analysts argue that investors can wait until later this year or 2012 when we will be better able to assess the sales uptake.
- Cadence is not a cheap stock. It has a market capitalization of $555 million. Additionally, the patent on Ofirmev affords protection only until mid-2018 and thereafter there is the potential for generic competition. When some analysts run a discounted cash flow analysis based on their estimates for Ofirmev, they conclude that the stock looks fully valued.
- There is always a great deal of uncertainty in projecting sales of new products and as often as not analysts overestimate sales potential.
I am positive on Cadence, but I do not want to address and then just summarily dismiss these legitimate concerns. My view on each of the issues cited above is as follows:
- I am not deterred by the lack of sales in 2011. I believe that the Ofirmev approval is a game changer that can propel Cadence into a medium tier, earnings driven bio-pharmaceutical company. I acknowledge the possibility that the stock might not trade up until sales materialize. However, this risk concerns me less than the possibility of missing the stock. If I have to be patient, so be it.
- I think that valuing the company on the basis of Ofirmev’s potential alone is not correct; it is only part of the investment equation. Ofirmev enables Cadence to build a powerful hospital sales force that will allow the company to acquire and market more products. I would not be surprised to see the company add a new important product each year. I also think that erosion of sales after the patent expires is less onerous for intravenous products than for oral drugs. Instead of a precipitous drop immediately after the patent expiration in 2018, I would look for a more orderly, measured decline.
- The nearly ten years of marketing experience with Perfalgan (Ofirmev) in Europe provides a good roadmap for estimating US sales. Street expectations for Ofirmev sales in 2011 are about $25 million and for 2012 the average is about $125 million. Sales estimates four years post launch are generally in the $350 to $500 million range.
The Launch of Ofirmev
Management recently stated that in the six weeks since its launch, Ofirmev has been placed on the formularies of 203 hospitals and characterizes this as better than expected. These formularies were in hospitals that span the range of potential hospital customers for Ofirmev, but are most biased toward larger hospitals. Generally formularies have placed few restrictions on use of the product once on the formulary.
Hospitals formulary status determines the use of a drug and gaining acceptance in the formulary is the gateway to success for Ofirmev. Management’s initial focus is to gain acceptance in as many formularies as possible. In the US, 750 hospitals account for 50% of the market and 1250 account for 80%. The company has given guidance that they expect 800 to 1000 hospitals to have added Ofirmev to their formularies by the end of the year. This is a year of gaining hospital formulary acceptance. Sales will be modest for the year with minimal sales in the first half and a moderate pickup in the second. It is expected that there will be a significant ramp in 2012.
The formulary process is different from hospital to hospital. In some, Ofirmev was simply considered as a different presentation of the existing oral acetaminophen already on formulary. At the other extreme, some pharmacy and therapeutics committees are requiring a thorough and lengthy analysis of the benefits and costs of Ofirmev. Investors should understand that this is a slow process as committee meetings have to be set up to accommodate busy schedules of diverse hospital personnel. It is not something that is done on the spur of the moment.
Management reports that there has been strong support from surgeons and anesthesiologists because they see Ofirmev as being opioid sparing. This is what I would expect. I believe that reducing opioid usage is a mantra inside and outside the hospital. To a significant extent, a safe intravenous, non-opioid analgesic is already pre-sold.
Use of Ofirmev
Ofirmev received an indication from the FDA that included management of mild to moderate pain when used as monotherapy and for moderate to severe pain when used in combination with opiates. It is also indicated for reduction of fever. Importantly, Ofirmev was approved for adults and children over the age of two, which is just about every patient in the hospital. It is also the only approved intravenous analgesic without a black box warning. This is a very broad and powerful label that will enable Ofirmev to be used broadly throughout the hospital.
Before Ofirmev, surgeons and anesthesiologists could only choose between opiates and NSAIDs in the post-surgical setting. Opiates account for 85% of unit usage in but are plagued with well-known side effects. They cause sedation, nausea, vomiting, constipation, coagulation impairment and respiratory depression. NSAIDs carry a black box warning because they cause gastrointestinal bleeding along with kidney and cardiovascular issues. Ofirmev will give physicians a much needed third option.
Cadence believes that mild pain in the hospital is best treated with intravenous acetaminophen. For more severe pain, intravenous acetaminophen should be used in combination with opiates. As an example, one of the pivotal studies showed that in the treatment of pain resulting from knee and hip replacement, intravenous acetaminophen combined with morphine rescue provided a statistically significant improvement in pain relief when compared to morphine rescue alone.
The liver toxicity issue that can sometimes be an issue with acetaminophen in the outpatient setting results from overdosing. In the controlled hospital setting, there is no issue. In the clinical trials, there was no difference in liver function between drug and placebo.
Marketing
Cadence has hired 147 sales representatives with an average of ten years of experience in the hospital selling. Their current territories have a 70% overlap with territories that the reps previously covered so that they generally have established a good rapport with their hospital customers. Cadence notes that on November 1, 2010, the day before Ofirmev was approved, 90% of its reps were working for other firms. Within 24 hours of approval, 112 people resigned to join Cadence. The fact that experienced reps were willing to bet their careers on the promise of Cadence is encouraging.
The marketing message is that intravenous acetaminophen can be used as monotherapy for mild pain. For more severe pain when used in combination with opioids, it can reduce the consumption of narcotics by 35% to 80%. This comes with increased pain control, improved patient satisfaction and a superior safety profile. Supporting this message are 69 publications on pain trials that have been published. Cadence expects an additional 20 publications this year and this will continue through the life of Ofirmev.
Market Potential
In the US, there are approximately 55 million post operative patients and 25 million non-operative patients who could be eligible for intravenous pain management each year. The basic unit of measurement for this market is the injectable analgesic vial. Estimates place the number of vials sold in 2010 at 296 million of which 258 million were opioids (morphine, meperidine, hydromorphone and fentanyl) and 38 million were NSAIDs, Toradol (ketorolac) and to a small extent Caldolor (ibuprofen). If Ofirmev were to sell 38 million units, it would create sales of $400 million.
In Europe, Perfalgan (Ofirmev) had estimated sales in 2010 of about $275 million and unit sales of about 100 million vials. Note that the price in Europe is much lower than in the US, about one-third the price. Estimates place the European market at about 455 million vials per year and it is estimated that Perfalgan has a 22% market share. It is estimated that 60% of the use of intravenous acetaminophen is in combination with opiates or NSAIDs or both. In Europe, 80% of eligible patients receive at least one dose of intravenous acetaminophen. If Ofirmev achieves 22% of the US market as is the case with Perfalgan in Europe, it could sell 65 million vials or $700 million.
The experience in the UK market could be representative of what might happen in the US. Perfalgan was launched there in 2004. In that year, 89% of patients received opiates, 2% Perfalgan and 9% NSAIDs. By 2009, 63% of patients received opiates, 35% Perfalgan and 1% NSAIDs. In terms of units, the amount of NSAIDs remained the same; they were just getting a smaller piece of a growing pie. About 66% of Ofirmev use in 2009 was in combination with opiates.
The price of Ofirmev appears quite reasonable even though it may be three times as high as in Europe. An Ofirmev vial sells for $10.75 and the average patient receives 4 to 6 vials. The hospital is paid a lump sum for surgical procedures called a DRG and has to cover all of the costs involved - surgeons, anesthesiologists, drugs, medical supplies, etc. - from this. The DRG for a general surgery procedure averages $23,000 per patient and if the average patient gets 4 to 6 vial of Ofirmev, the cost to the hospital is only $43.00 to $64.50. However, the use of the product results in reduced nausea and vomiting and time spent in the post-operative care unit and also less use of opioid analgesics. This suggests that it is highly cost effective.
The interest by surgeons and anesthesiologists in a safe alternative to opioids was well illustrated by the launch of the NSAID Toradol about 20 years ago. It started with a very steep sales growth curve, but this was abruptly halted when the FDA required a black box warning about gastrointestinal bleeding and kidney and cardiovascular issues. Sales were cut in half and never rebounded. For years, the NSAID unit market has been flat at 38 to 39 million units. However, the initial launch of Toradol seems to confirm that physicians are looking for non-narcotic analgesics; they just need a safe alternative.
In a US survey conducted by Cadence, the product characteristics of Ofirmev were described to surgeons and anesthesiologists. They responded that they would use it in 70% of patients. Virtually all respondents expected to incorporate it into their practices within one year
Cadence is encouraged that the US market opportunity will be at least as good as Europe and could be better. Cadence will market Ofirmev with a dedicated sales force. In Europe, Bristol Myers largely promoted Perfalgan as a secondary call for its oncology sales force. It did not receive much marketing emphasis.
Beyond Ofirmev
Cadence is built to be a commercial entity marketing many products. The company has not put 147 sales representatives in place just to address the market opportunity of Ofirmev. The sales force will emerge as a strategic asset as they work to acquire other products and leverage the productivity of the sales force.
Along this line, the company recently announced that they had acquired an option to acquire Incline Therapeutics. That company’s IONSYS system was developed by Alza and was approved for use in patient controlled analgesia (PCA). It has all the features of the standard pole setup for PCA, but is offered as a patch. This product had to be withdrawn in 2008 due to issues that use could lead to overdosing. Incline is now working to solve these issues and get the product back on the market.
Product Supply
Baxter Laboratories (BAX) is the primary manufacturer of Ofirmev and has been performing well. They are producing product ahead of schedule. Late last year Cadence also entered into a supply agreement with Bristol-Myers Squibb to source the product out of Italy as a secondary source. They don’t want to be at risk of having just one source of supply.
They also signed an agreement with Baxter to build a second line in the Cleveland, Mississippi facility which will come on line in 2012. With the Baxter and Bristol agreements, Cadence can rapidly expand production if demand increases faster than current expectations.
Intellectual Property Position
Cadence maintains that Ofirmev’s patent protection is unassailable. The manufacturing patent expires in late 2017 and the company will get an additional six months of pediatric exclusivity that will carry it into 1H, 2018. Theirs is the only process that has ever resulted in a stable intravenous formulation of acetaminophen. They believe that the patent covers all excipients needed to produce the Ofirmev formulation.
For another company to manufacture this product, they would need specialized equipment beyond what they would already have in place. It is much more difficult than with solid oral dosage forms to find manufacturers. Worldwide, the capacity for injectables is dramatically less than for solid dosage forms. The two largest suppliers, Baxter and Bristol-Myers Squibb, are barred from providing product to a generic company in the US. Generic penetration post the 2018 patent expiration should be much slower than with solids; there will not be 90% erosion in the first year. Generally it takes several years for capacity to be built up and for generics to gain significant share.
Finance
Cadence raised $94 million in November of last year after the approval of Ofirmev. This allowed them to end the year with $135 million of cash. Consensus expectations call for a cash burn of about $80 million in 2011 and anywhere from slight profitability to a loss of $30 million is expected in 2012. The company appears to have enough cash to reach cash flow breakeven without the need for additional equity. If they do need capital, I would expect it to be done with a debt financing.
Disclosure: I am long CADX.
