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Investment Opinion

Many or most investors have written off the launch of Ofirmev as either disappointing or an outright failure. I think they are wrong. In its most recent company presentation, Cadence Pharmaceuticals (CADX) released some unusually detailed figures on the number of Ofirmev vials sold in each month of 2011. These show impressive sequential month over preceding month increases of 15% to 20% in the last six months of 2011.

Using this as a framework, I have come up with base case estimate for 2011 based on 10% sequential increase in vial sales for each month of 2012. I think that this might be conservative relative to the recent 15% to 20% sequential increases, but even so it results in nearly a fivefold increase in vial sales to 5.3 million in 2012 and an increase in Ofirmev sales from $11.5 million in 2011 to $53.4 million in 2012.

Off of my 2012 base case, I have projected a slowing in the sales trajectory in both 2013 and 2014, but I still come up with impressive sales projections of $138.9 million in 2013 and $236.1 million in 2014. Of more interest, I project EPS (largely untaxed) of $0.73 in 2014. If this proves correct, the application of a seemingly modest P/E ratio of 11x EPS would result in an $8 stock price in that time frame. Based on this, I continue to recommend purchase of Cadence.

Investment Overview

One of the major negative investment themes in bio/pharma that has developed over the last few years is that the first year for new product launches for the majority of new products has been disappointing. Many hedge funds have now adopted the routine practice of shorting companies with new product launches. There are several factors that have been responsible for this with the increased role of formularies being the most important. In what now seems to be the distant past, there was little that stood between regulatory approval of a new drug and physician prescribing. Formulary access and restraints placed on drug usage even after formulary acceptance now looms as a large boulder.

Ofirmev is sold within a hospital and the continual pressure on hospital revenues and costs has made the formulary a major tool to control money spent on drugs. Before a doctor can prescribe a drug it must first be approved and on formulary. The formularies are usually controlled by pharmacists who are judged on cost control and not necessarily on therapeutic outcomes. I would hasten to add that I am not saying that formularies are a bad thing; the control of costs is an important aspect of medicine. However, in the zeal to control costs a collateral effect is that it takes a long time to get a product on formulary and additional time to make it available for broad prescribing in the hospital.

There is no set way that a formulary operates, but a typical one might require that a physician or group of physicians sponsor a new drug for formulary inclusion. This triggers off one or a series of committee meetings that try to determine the therapeutic importance of the drug and its cost effectiveness. This process can take some time, usually several months. There seems to be an informal rule emerging at some institutions that a new drug has to be on the market for six months or so in order to gauge the potential for side effects before formulary access is considered.

After leaping over the hurdle of gaining formulary access, the drug marketer must then broaden usage throughout the hospital and beyond the original product champion. This is followed by marketing efforts that expand the patient usage and increase doses per patient. This must be in accordance with the product label, of course. All of this adds additional time.

Looking at the Ofirmev Launch

For a basic understanding of Ofirmev and its role in the US hospital pain market, I would refer readers to my report of March 13, 2011, Cadence Pharmaceuticals: A Rising Star. My expectations at the time of that report were in line with Street consensus expectations that sales would reach $25 million in 2011, $125 million in 2012 and that four to five years out sales could approach $350 to $500 million. Quarterly sales results in 2Q and 3Q, 2011 were below expectations and caused me to reduce my 2011 sales estimate to $11.6 million, again roughly in line with Street expectations. The purpose of this report is to go into my projections for 2012 to 2014, which I will discuss shortly.

Management's initial focus with Ofirmev was to gain acceptance in as many formularies as possible. In the US, 750 hospitals account for 50% of the IV analgesic market and 1,850 accounts for 80%. The company gave guidance early in 2011 that they expected 800 to 1,000 hospitals to have added Ofirmev to their formularies by the end of the year. They actually far surpassed this guidance as Ofirmev was on formulary in 1,580 hospitals by year end.

There have been several disappointing launches of hospital-based products from other companies in recent years and in each case there was difficulty getting the product on the formulary. Clearly this is not the case with Ofirmev. Rather it has been an issue with getting broad usage in the hospital after formulary acceptance. In its latest corporate presentation, Cadence published informative data in a recent company presentation that showed monthly sales of vials of Ofirmev. These indicate to me that the company is broadening prescribing within the hospital and that the product is now beginning to gain traction.

Ofirmev Projections for 2012

I have reproduced this data on monthly vial sales for 2011 in the following table shown below. Using the price of $10.00 per vial, it is then possible to estimate monthly sales:

Number of Vials (000) Sequential Increase Sales (000) @ $10.00 per vial
2011 Month Cumulative % # of vials Month Cumulative Sequential
January 3.2 3.2 0% 3.2 $32 $32 $32
February 9.0 12.2 185% 5.9 $90 $122 $59
March 20.9 33.1 132% 11.9 $209 $331 $119
April 34.5 67.6 65% 13.5 $345 $676 $135
May 55.2 122.7 60% 20.7 $552 $1,227 $207
June 80.8 203.5 46% 25.6 $808 $2,035 $256
July 95.1 298.6 18% 14.3 $951 $2,986 $143
August 121.4 420.0 28% 26.3 $1,214 $4,200 $263
September 140.6 560.6 16% 19.2 $1,406 $5,606 $192
October 169.2 729.9 20% 28.6 $1,692 $7,299 $286
November 191.3 921.1 13% 22.0 $1,913 $9,211 $220
December 226.9 1,148.0 19% 35.6 $2,269 $11,480 $356

I interpret this data as being quite encouraging. The first thing that catches my attention is that, since July, there has been a consistent sequential monthly increase in vials sold of about 15% to 20%. Also of note is that the annualized run rate based on sales in December was about $29 million.

Projecting Future Sales of Ofirmev

This data release gives an analyst much more detail than is usually the case. Estimates of vial growth for each month of 2012 can be made based on estimates of sequential monthly growth. To do this, I use as a starting point the 15% to 20% sequential growth seen in the last half of 2011 and judge whether it will increase, decrease or stay at the same level.

In the recent corporate presentation available on the Cadence website, management shows a number of metrics that affect sequential growth. These include hospital formulary acceptance, growth in new customers, average order frequency, increasing order size and estimated share of surgical procedures. Each of these metrics is in a strong uptrend that might be interpreted as acceleration of vial sales growth.

I have looked at the potential for vial sales and Ofirmev revenues in 2012 based on a number of scenarios for monthly sequential sales growth. I am using as my base case an estimate of sequential monthly sales increases of 10% for each month in 2012. My inclination is that this may prove to be conservative. Based on this assumption, I have come up with the following monthly estimates:

2012 Estmates Assuming 10% Monthly Sequential Increases in Vial Sales
Number of Vials (000) Sequential Increase Sales (000) @ $10.00 per vial
Month Cumulative % # of vials Month Cumulative Sequential
January 250 250 10.0% 23 $2,496 $2,496 $227
February 275 524 10.0% 25 $2,745 $5,241 $250
March 302 826 10.0% 27 $3,020 $8,261 $275
April 332 1,158 10.0% 30 $3,322 $11,583 $302
May 365 1,524 10.0% 33 $3,654 $15,238 $332
June 402 1,926 10.0% 37 $4,020 $19,257 $365
July 442 2,368 10.0% 40 $4,422 $23,679 $402
August 486 2,854 10.0% 44 $4,864 $28,543 $442
September 535 3,389 10.0% 49 $5,350 $33,893 $486
October 589 3,978 10.0% 54 $5,885 $39,778 $535
November 647 4,625 10.0% 59 $6,474 $46,252 $589
December 712 5,337 10.0% 65 $7,121 $53,373 $647

This base case assumption predicts that vial sales in 2012 will increase by nearly fivefold to 5.3 million and sales will increase to $53.4 million up from $11.5 million in 2011. I am inclined to think that the 10% estimate for sequential monthly increases in vial sales is conservative, but for the time being I am going with this as my base case.

I have used the same methodology shown above to come up with some "what if" scenarios for different assumptions. With a 5% sequential monthly increase, my 2012 sales estimate would be $40.7 million, with 15%, $81.4 million and with 20% $115.9 million. Let's see how the year unfolds.

The Outlook for 2013 and 2014

I think that the law of large numbers will cause a slowing in the sales trajectory in 2013 and 2014, but I would expect it to continue to be quite impressive. I think that the company can show a respectable profit in 2014 of $0.73.

2011 2012 2013 2014
Sales $11,638 $53,373 $138,900 $236,130
Pretax Income (102,149) (74,100) (574) 67,487
Net Income (102,149) (74,100) (545) 64,113
EPS ($1.54) ($0.86) ($0.01) $0.73
Shares Outstanding 66,185 86,056 86,916 87,785
Source: Cadence's Ofirmev Launch Is Gaining Traction