Overview and Stock Opinion
I continue to recommend purchase of Cadence (CADX) based on trends seen in the 1Q, 2011 period. The details of my recommendation are outlined in my report of March 13, 2011.
I believe that Ofirmev meets a major unmet need for an alternative to narcotics and NSAIDs in the intravenous analgesic market. There has been very little innovation in this area and hospitals are under intense pressure to reduce narcotics use without sacrificing pain relief.
The company just reported 1Q, 2011 results in which sales of Ofirmev were $350,000 based on 34,000 doses sold. The company is now 15 weeks into the launch and at this point, investors are focusing on formulary acceptance to gauge potential success. More meaningful sales should begin in 3Q and 4Q of 2011.
I do not have access to all of the Street estimates for Ofirmev sales and in the numbers I cite below there is some chance that the numbers may not accurately represent the range. However, my best judgment is that they are reasonably reflective of what investors are looking for.
- Street expectations for 2Q, 2011 sales of Ofirmev range from $1.5 million to $2.5 million. This is probably a reasonable expectation in my opinion, but the numbers aren't that meaningful.
- The full year numbers for 2011 will be more meaningful. I am looking for sales of $25 million. Street estimates range from $13 million to $35 million.
- Expectations for 2012 are $110 to $142 million. I am at $125 million.
- Peak sales estimates range from $400 to $500 million. I think there is a case to be made that this is too low.
Formulary Acceptance Continues to Be Excellent
A new paradigm that has emerged in biotechnology investing over the last few years has been slow formulary acceptance and resultant disappointment in introductory sales. The recent experience with Cumberland's (NASDAQ:CPIX) Caldolor, Savient's (SVNT) Krystexxa, and NeurogesX's (OTCPK:NGSX) Qutenza are examples.
Cadence stands apart with the rapid formulary acceptance experienced by Ofirmev. As of April 30, 2011, the company in just 15 weeks of marketing has obtained formulary acceptance at 675 hospitals representing over 30% of the targeted market opportunity. This has caused the company to increase guidance on formulary acceptance from 800 to 1200 hospitals by the end of the year. This would represent 50% of the total US intravenous analgesic market opportunity for Ofirmev.
It takes about six to eight weeks to take place from the time Ofirmev is placed on formulary until physicians begin to use it. This is the due to working out logistics to supply the product to the hospital at places where it is needed.
In 75% of the 675 formularies now offering Ofirmev, it has been added on an unrestricted or minimally restricted basis. Management reported that just under 600 hospitals are actually stocking the product. The company's success rate for acceptance after the first presentation is about 90%. There are several hundred meetings scheduled in the immediate future.
CEO Ted Schroeder stated that in past product launches with which he has been involved, he would have been happy to have had 675 meetings scheduled at this point in the launch. He is very encouraged by already being in 675 formularies.
Comparing Ofirmev to Launch of Caldolor
Caldolor is an injectable formulation of the NSAID ibuprofen that was approved in June of 2009 and has been on the market for about 18 months. It is indicated for the same patient audience as Ofirmev. As an NSAID, it has a black box warning for cardiovascular and gastrointestinal side effects that is carried by all members of this class of drugs.
Caldolor has struggled mightily to find a foothold in the market and has had difficulty in gaining formulary acceptance. It was on 300 formularies at the end of 3Q, 2010, 375 at 4Q, 2010 and 400 at 1Q, 2011. Sales are annualizing at somewhere between $0.5 and $1.0 million per year.
This brings home how striking the rate of formulary acceptance has been for Ofirmev.
Bringing on Second Manufacturing Facility
The FDA approved a supplemental NDA in March 2011 for a second manufacturing facility in Anagni Italy. This is the plant that produces intravenous acetaminophen for Bristol-Myers in Europe. Having a second manufacturing facility is important for adding capacity and geographic diversity. Reliance on one manufacturing facility carries significant risk from natural or manmade disasters. Cadence's first facility that is owned by Baxter is located in Cleveland, Mississippi. Imagine if the tornados that just ravaged the south had destroyed this plant. Having backup is important.
The capacity of the Baxter manufacturing facility is 15 million units per year which translates into end sales of $158 million. The specific capacity of Anagni was not stated other than to say that with Baxter and Anagni, Cadence now has far more capacity than will be needed in the next couple of years,
Not Yet Exercising Option to Acquire Incline Therapeutics
Cadence elected not to exercise its just expired first option to acquire Incline Therapeutics for up to $135 million. Management stated that it wanted to focus on the Ofirmev launch. Cadence continues to be very interested in Incline and expects that company to file a sNDA for its Ionsys fentanyl transdermal system in late 2012 or early 2013. Cadence expressed continued interest in acquiring Incline at a price of up to $228 million during the second option period which extends until 30 days after Incline files an IPO or December 2013.
Cadence reported a cash position of $109 million at 1Q, 2011. I am estimating a cash burn rate of $20.3 million in 2Q, 2011, $17.1 million in 3Q, 2011 and $14.9 million in 4Q, 2011. This would result in a year end cash position of $57 million. My projections indicate that the company may be close to positive cash flow for full year 2012. The company has adequate cash to take the company into positive cash flow by my projections without an equity raise.
Cadence received a $5.3 million milestone payment for Terumo in April for rights to commercialize intravenous acetaminophen in Japan.
Disclosure: I am long CADX.