By Jason Napodano, CFA
Shares of Pozen (POZN) peaked in April 2012 and have been in a steady decline ever since. The sell-off was accelerated by sales figures in late October 2012 from Vimovo partner AstraZeneca (AZN), showing limited market acceptance for the combination 500 mg naproxen and 20 mg delayed-release esomeprazole product. AstraZeneca's financial results showed that Vimovo generated only $14 million in sales in the third quarter and $47 million for the first nine months of 2012. Sales of Vimovo totaled only $4 million in the U.S. during the third quarter. AstraZeneca has turned its attention to international markets for Vimovo, as it is clear the opportunity for Vimovo in the U.S. is limited.
The single biggest question we receive from investors on Pozen is, "If Vimovo is such a commercial failure in the U.S, why should we expect any different from PA?" It's a valid question. Pozen designed Vimovo as a "safer NSAID" product for patients either taking daily naproxen or branded medications such as Pfizer's (PFE) Celebrex (celecoxib). Similar to aspirin, naproxen has nasty gastrointestinal side-effects, and the Vimovo formulation, which includes a delayed-release esomeprazole, the active ingredient in AstraZeneca's Nexium, protects the stomach from potential harm. Pozen's PA product combines 325 mg aspirin and 40 mg delayed-release omeprazole. Omeprazole is the active ingredient in AastraZeneca's Prilosec, but is now available both as a generic and over-the-counter.
The problem with Vimovo, however, is the pricing strategy. Vimovo costs around $2 per pill ($4 per day) without a prescription. Although cheaper than branded Celebrex at around $6 per day, Pfizer has spent years building brand awareness and formulary coverage for Celebrex, and the drug is now widely covered at Tier 2. For most people, this may be a $25-40 co-pay for a one month prescription. Vimovo is mostly covered at Tier 3, which could mean anything from a $50-100 co-pay. Why pay twice as much for Vimovo as Celebrex? There is a reason why Pfizer sold as estimated $2.6 billion worth of Celebrex worldwide in 2012.
PA Is Not Celebrex, But It's Not Vimovo Either
Unlike Vimovo at roughly $4 per day (BID dosing), Pozen plans to market PA at around $1 per day. Management has done substantial market research showing broad acceptance for the product at this price. The company's investor presentation notes the company has spoken to 130+ payers, 2100+ healthcare providers, and 2600+ patients. It's safe to say that management at Pozen has learned from AstraZeneca's mistakes with Vimovo and does not intend to travel down the same futile path.
We've written in the past that Pozen's Phase 3 data from the two PA clinical trials was fantastic. Below is a snap-shot of the Phase 3 data showing the impressive reductions in gastric ulcers (by 63%), gastro-duodenal ulcers (by 71%), and discontinuations (by 82%) after six months of daily PA therapy vs. 325 mg of enteric-coated aspirin.
Pozen was an active presenter at both the American College of Gastroenterology (ACG) meeting in October 2012 (see Poster #P608) and the American Heart Association (AHA) meeting in November 2012 (see Poster #12057). To our surprise, the market shrugged off the data, fixating on the failure of Vimovo to gain traction and the belief that Pozen's PA product is the same weak idea.
No one over here is calling PA a blockbuster, but we think the market has underestimated the potential for PA simply because of Vimovo. To get a sense of how big PA can be, we first looked at the overall patient population. Aspirin is recommended for the secondary prevention of cardiovascular (source) and cerebrovascular (source) events. However, daily aspirin therapy is associated with adverse gastrointestinal events, including gastric ulceration and bleeding, as well as dyspepsia and GERD-like symptoms which may limit the patient compliance and continued use (source). This was evidenced in Pozen's two Phase 3 trials.
In the U.S. alone, there are 24 million secondary prevention patients. Pozen has conducted market research and discovered that nearly 80% already use daily aspirin therapy. Meta-analyses and peer-reviewed research concludes that around 20% of these patients are at risk for upper-gastrointestinal bleeding and gastric or duodenal ulcers. Pozen's Phase 3 trial showed that 8.2% of secondary prevention patients on 325 mg enteric-coated aspirin discontinue after six months. A systematic review and meta-analysis on the hazards of discontinuing or not adhering to daily aspirin therapy shows a greater-than threefold increased risk of a potentially fatal cardiovascular event.
Pozen's extensive market research (noted above) finds that 40%-60% of physicians recommend using gastro-protective agents, such as proton pump inhibitors (e.g., omeprazole) to 35%-50% of their patients. The interesting thing is, Pozen found that over 80% of physicians would prescribe PA instead of the separate components of OTC aspirin and OTC or Rx proton pump inhibitor if the cost was comparable. Amazon.com sells a 500 tablet bottle of 325 mg aspirin for $11.00, or 2.2 cents per day. One can also buy 42 20 mg tablets of OTC Prilosec (omeprazole) for $23.95, or around 57 cents per pill. To re-create Pozen's PA-325/40, a patient would spend approximately $1.16 per day.
Pozen's market research with payers yielded some encouraging results. Pricing is the key component of interest, and payers expressed to Pozen that PA must be "cost-neutral" to the patient for Tier 2 coverage. A Tier 2 formulary listing equates to roughly $25 - 40 per month based on individual insurance plans. The current out-of-pocket cost for a patient buying OTC aspirin and Prilosec is around $35 per month. At this cost-neutral price, Pozen's market research shows a potential 36% market share.
If we multiple all the numbers above out, we arrive at a pretty attractive peak market opportunity for Pozen's drug. Let's do the math:
Given that we've outlined the market opportunity at $260 million in the U.S., the key question for investors in Pozen is: What kind of commercialization partnership can Pozen sign? Pozen management is guiding to filing the U.S. new drug application (NDA) in April 2013. We recently met with Pozen's CEO John Plachetka and CFO William Hodges at an investor conference in San Francisco on January 7, 2012. Dr. Plachetka expressed a desire to have a partnership in place on PA before the end of the second quarter 2013.
Pozen has been very good at signing commercialization partnerships. The company landed pharmaceutical giant GlaxoSmithKline (GSK) in June 2003 to help develop and commercialize the U.S. rights of Treximet, a combination naproxen and sumatriptan product for migraine attacks. In March 2011, Pozen secured Desitin Arzneimittel GmbH for the EU rights and Johnson & Johnson (JNJ) for the South American rights to the same drug. As noted above, the U.S. and International rights to Vimovo were licensed to AstraZeneca in August 2006.
We haven't even begun to talk about the European market for PA. Pozen plans to file the EU marketing authorization application (MAA) during the second half of 2013. We suspect the market opportunity in Europe is about equal to the U.S. On a global basis, we think PA has the potential to be a $400 million product.
What Does It All Mean?
Pozen currently has a market capitalization of only $165 million. We forecast that Pozen exited 2012 with roughly $87 million in cash and investment, with an operating burn of only a few million per quarter. Vimovo is annualizing at around $60 million per year, with all the growth overseas. We remind investors that AstraZeneca has undertaken regulatory filings in 80 countries for Vimovo to date. The drug has been approved in 60 countries and launched in 40 as of October 2012.
Pozen receives around a 10% royalty on sales of Vimovo. If we assume essentially no growth in the U.S. and only modest growth internationally, the royalties from Vimovo alone are still worth an estimated $50 million. Don't believe us? Take a look at what Pozen did with the Treximet royalties back in November 2011. And, there is reason to believe that AstraZeneca may get more aggressive with Vimovo pricing after the Nexium patent expires in 2014. So the cash and Vimovo royalties alone sum to a market value of roughly $135 million.
That means at today's price, the market is valuing Pozen's PA product at $30 million. If the company does what we think they are going to do, which is secure a commercialization partner for PA around the time of the NDA filing in April 2013, the upfront payment alone for PA could equate $30 million. That is less than 10% of our best guess for peak global sales (a fair assumption). We think once the market does the math on the size of the market opportunity for PA and Pozen's unique "affordable / cost-neutral" pricing strategy, the shares will head higher, and could re-test those old highs from April 2012.
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