With the recent FDA approval (May 2011) and launch (July 2011) of DIFICID (fidaxomicin) for the treatment of Clostridium difficile-associated diarrhea (CDAD) in patients 18 years or older from Optimer Pharmaceuticals, Inc. (NasdaqGM: OPTR), investors are now squarely focused on the sales potential of this new antibiotic. We conducted a survey of 62 prescribing physicians in our Expert Network and have related these results to the sales potential of DIFICID and correspondingly, to the valuation of shares of OPTR. The full details of our survey can be downloaded at no cost here.
On September 13th, Optimer CEO, Pedro Lichtinger, provided an early update on the launch of DIFICID. He noted that for the period of July 19, the date of DIFICID's first sales, through September 2, Optimer estimated DIFICID gross sales of $3.9 million, which represented over 1380 treatments. Furthermore, he noted that 99 hospitals have added DIFICID to their formulary, 23 with unrestricted access, 68 requiring an Infectious Disease (ID) or Gastroenterologist (GI) specialist consultation, and 8 requiring prior authorization. Going forward, 168 formulary committee reviews are scheduled over the next few months. Hence, Optimer viewed the initial launch as one of the better hospital-based product launches in recent times. Investors seemed to agree, as shares reached a 52-week high of $17.95 on September 23, or 10 days after the announcement.
We ask, “how big is the market opportunity for DIFICID? What percent of the market can DIFICID realistically grab? How do these expected sales related to shares of OPTR?” We conducted a survey to help answer these questions.
First, let’s look at valuation. At a price of $15.00 per share, with 46.6 million shares outstanding, Optimer has a market capitalization of approximately $700 million. Optimer reported cash of $158.7 million and no debt at the end of the second quarter (June 30th). Optimer therefore has an enterprise value (EV) of approximately $540 million.
We are, however, more interested in what the EV will be in 12 months. Optimer burned $21.4 million in 2Q, which if annualized equates to an annual burn of $85.6 million, which is a rough approximation. This calculation does not account for increasing DIFICID sales. Importantly, Optimer is eligible for 115.0 million Euros ($160 million at today’s exchange rate) by Astellas (OTC:ALPMY) for specific regulatory and commercial milestones, including 40 million Euros payable on either 6 months of EMA approval (expected 1Q12) or launch in 2 major E.U. territories and 10 million Euros payable to Optimer upon launch in any Astellas territory. Astellas licensed rights to DIFICID in Europe, Middle East, Africa and Commonwealth of Independent States in February 2011. Hence, for our calculation, we expect that Optimer should receive roughly $83 million of the milestones from Astellas over the next twelve months. This assumes E.U. approval in 1Q12 [European Medicines Agency (EMA) adopted a positive opinion in September].
If we set DIFICID sales aside, the 12-month burn, which we estimate at roughly $86 million, should be offset with the near-term Astellas milestones, which we estimate at $83 million. At a price of $15.00, the 12-month EV, which incorporates the burn and milestones, is approximately $543 million. Clearly, with this current and projected 12-month EV, the street is expecting meaningful sales of DIFICID.
In order to gain insights into the sales potential of DIFICID, we solicited 785 gastroenterologists and infectious disease doctors who are in our proprietary Expert Network to participate in a survey. We received responses from 62 physicians. From their responses, we learned that each physician treats a median of 4.5 CDAD patients per month, or 54 patients per year. We then estimate that the total number of treated CDAD cases in the US is 540,000. This calculation assumes a total treating physician pool of 10,000, which is the approximate number of gastroenterologists in the US. We didn’t include infectious disease physicians in our calculation to be conservative. Optimer states that they believe the total number of cases in the U.S. is ~700,000, which consists of 350,000 hospital cases, 260,000 long-term care cases, and 60,000 outpatient cases. This may be accurate, but for our analysis, we will use the data from our survey and conservative assumptions on number of treating physicians.
CDAD has been historically treated with FLAGYL first line and vancomycin second line. We sought to understand where physicians intend to use DIFICID, given its proven benefits over vancomycin. Awareness of DIFICID is high, at 85% of responders, and almost 20% intend to use the drug first line, 60% intend to use after FLAGYL failure, and 67% intend to use in vancomycin failures. We found these results informative as DIFICID could have been reserved for just vancomycin failures, or third line. This does not appear to be the case and DIFICID should enjoy widespread use.
The physician intention is only half of the sales equation. The payers control the other half of the equation. While still very early in the launch (only 15% of responders have prescribed DIFICID), the survey results indicate that 97% of responders have not faced reimbursement issues with DIFICID. This observation is consistent with Optimer’s launch update statement on September 13th that only 8 of the 99 hospitals that placed DIFICID on formulary have required prior authorization. Should formularies continue to incorporate DIFICID with limited prior authorization, we believe sales will be poised for growth.
Ultimately, the survey responders indicated that they intend to treat 20% of their total CDAD patient population with DIFICID in 12 months, or 108,000 patients annually (using our U.S. estimate of 540,000 cases). At a net price of approximately $2,200 per course of therapy (this price assumes some discounting), this level of penetration would result in sales of $237.6 million in the U.S. Optimer owes Par Pharmaceuticals a 5% net royalty on sales, hence we model U.S. sales of $225 million to Optimer.
We estimate that the Astellas’ territories, including the E.U., may eventually contribute sales similar to the U.S., or approximately $238 million. Optimer has stated that they are eligible receive escalating double-digit royalties ranging from the high teens to low twenties on net sales of DIFICID products in the Astellas territory. If the 20% royalty is met, we estimate that the net royalty due Optimer will be approximately 14% (Optimer must pay Par a 6.25% royalty on these sales), or $26.5 million.
Before valuing the projected U.S. sales revenue and the Astellas’ royalty, we note that DIFICID benefits from patent protection out to July 2027, according to the FDA Orange Book, which excludes any pediatric extension. Hence, this is a long-lived asset that should command premium value. We believe applying a 5x multiple on sales is appropriate, as is applying a 10x multiple on the royalty revenue, which is pure profit. This calculation would result in a valuation of these sales and royalty revenue of $1,391 million, or approximately $30 per share.
Our $30 per share future value for the expected U.S. sales and Astellas’ royalty does not include additional milestone revenue from Astellas, the current and future cash on the balance sheet or any additional licensing revenue derived from several of the unpartnered territories, including Japan. Hence, there is upside to this share price.
Furthermore, shares of Optimer should trade with a “acquisition premium,” due to the fact that there is a long list of potential acquirers who are desperate for products, including Astellas and Cubist (NasdaqGS:CBST), who both know DIFICID intimately. Cubist is co-promoting DIFICID in the U.S. under an initial two-year term agreement where Optimer pays Cubist $15.0 million each year, with Cubist eligible for an additional $17.5 million if certain sales milestones are met. I think one needs to own the stock now because you never know when a strategic steps in, which may occur once the strategic recognizes that DIFICID sales are ramping significantly.
We think that if DIFICID appears on track to achieve our projected sales estimates, which are based on our proprietary survey results, that shares of OPTR will be valued roughly in line with our calculation. Hospital launches are notoriously slow given the requirement of Pharmacy and Therapeutics (P&T) Committees to meet and vote on the inclusion of new drugs onto their formulary (168 formulary committee reviews are scheduled). Hence, we have less visibility on the timing of when DIFICID sales achieve our estimates and shares of OPTR reflect that success, but all indicators to date suggest they should eventually get there. The next catalysts for the stock include the quarterly earnings announcements and the E.U. approval of DIFICLIR, expected 1Q12.