Flamel Technologies: Second Competitor Leaves Neostogmine Market

| About: Avadel Pharmaceuticals (AVDL)

On the heels of the report that I recently published about Flamel Technologies (FLML), a very important update by the Federal Drug Administration has gone largely unnoticed by investors. In that update to the FDA's drug shortage web page, the FDA noted that a second competitor to Flamel's Bloxiverz, the only FDA-approved formulation of Neostigmine Methylsulfate, has the drug on backorder and is not currently supplying the drug to hospitals. This announcement follows the voluntary withdrawal from the Neostigmine market by American Regent. These two companies controlled 50-60% of the market, and this recent development leaves only West-Ward Pharmaceuticals as the only remaining competitor in a market that has been severely supply constrained for many years.

I believe that Flamel Technologies is now on its way to quickly capturing 40-50% of the market ($30-40 million revenue) and it should capture the entire market ($80 million) once the FDA removes the remaining non-approved product from the market, which should occur imminently. Westward is unlikely to aggressively go after this share as FDA action could leave it with a sizeable inventory write-off once it is mandated to withdraw from the market, and Flamel should finally begin to generate substantial revenues from Bloxiverz. As a result of this recent event, I expect Flamel to be cash flow positive in the first quarter of 2014 and then substantially cash flow positive once West-Ward leaves the market. As I have written in a previous article, I expect Flamel to dominate the Neostigmine market for at least three years. Neostigmine is used in approximately 5 million surgeries annually and Flamel has priced its product at $15.96/vial. I expect typical drug industry price increases and project annualized revenue of $80 million one month after FDA action and $120-140 million peak before generic competition enters market, probably in 2017. During this period, operating margins should average 70%.

The next catalysts on the horizon are data on two CNS products and two metabolic/CV products using both Flamel's small molecule controlled-release drug delivery technology and the company's controlled-release technology for biologics. We believe at least two of these products have blockbuster market potential. In addition, a PDUFA date of April 28, 2014 is scheduled on the second product under the FDA's Drug Efficacy Implementation Program. While the company does not disclose details on the filings for competitive reasons, I believe is could be similar in size to Bloxiverz resulting in cash flow for both products of $350 million over a three to four year period. Finally, I expect the company to file at least two additional NDAs under the DESI program, which should provide the company with as much as another $350 million of cash flow.

Flamel Technologies is one of the most undervalued stocks in the pharmaceutical sector and I believe the stock could double based on the aforementioned catalysts. After generating losses for more than two decades, significant change has taken place at the company over the past 2 years, and this has been missed by most institutional investors except for a handful of savvy, dedicated health care hedge funds, such as Deerfield Management and Broadfin Capital, which together own approximately 35% of the company.

Deerfield purchased a 20% stake in early 2012 and subsequently sold privately-owned Eclat Pharmaceuticals to Flamel. Eclat Pharmaceuticals was the brainchild of Mike Anderson, a senior executive with deep experience in the pharmaceutical industry. His business plan was to file NDAs on 4-5 existing drugs that have been on the market for decades but never obtained regulatory approval as they were grandfathered by the FDA when this regulatory requirement was first put in place by the agency in 1962. In addition to acquiring these projects, Flamel added Anderson as its CEO and, a few months later, added a senior partner from Deerfield as head of business development. Under Anderson's leadership, the company changed strategy from a drug delivery company to a fully integrated specialty drug company and added an experienced industry executive to head R&D.

Two years later, FLML is at an exciting inflection point and is on the cusp of dramatic earnings and cash flow growth after two decades of losses. The first signs of this transformation should become increasingly evident in coming months when the company's first approved product, Bloxiverz, begins to capture the share of the withdrawn products and as the FDA removes the one remaining competitor from the market. Flamel will have a 100% share of an $80+ million market at launch and $150 million peak sales two years out. As this product is sold to hospitals, it will require minimal selling expenses and operating margins should approach 70%. I believe Bloxiverz can generate approximately $180 million in cash for FLML over a three-year product life cycle. Furthermore, 3 more similar-size Eclat products are on deck to continue the cash flow for several years to come. I believe these 4 products could generate $500-700 million in cash flow over the next 5 years. I think management is committed to substantial earnings generation, and much of this cash flow will fall to the bottom line, which could result in EPS of $0.50-$1.00 in 2014 and well over $1.00 in 2015. Flamel has a market cap of just $195 million and a relatively small share base of 25 million shares. The stock currently trades at a price-earnings ratio of 7x our forward earnings estimate and less than 1x the cash flow to be received by Bloxiverz alone. I believe the stock should be valued closer to $20 today based on Bloxiverz and the other Eclat products alone and assigning no value to the Flamel drug delivery platform or $170 million in net operating loss carry-forwards.

Disclosure: I am long FLML. 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.