Sucampo Pharmaceuticals Q3: Surprise Likely

Summary

The removal of CVS coverage for AMITIZA in 2016 helped lead to lower market expectations.

However, this leading pharmacy benefit management company only impacted a fraction of U.S. AMITIZA patients.

Sucampo has global marketing partners, and AMITIZA is establishing an international presence.

Sucampo Pharmaceuticals, Inc. (NASDAQ:SCMP), a small biopharmaceutical company (market cap: $588.33 million), is a pioneer in therapeutics based on prostones, which are naturally-occurring fatty acid metabolites that function as selective ion channel activators and are believed to act locally to restore normal function in cells and tissues. The company's pipeline is focused on the development of prostones to treat gastrointestinal, autoimmune, and oncology-based inflammatory disorders (Figure 1). Sucampo has two commercial products: its lead product AMITIZA (lubiprostone), and RESCULA (unoprostone isopropyl), a minor ophthalmic holdover brand in Asia from the company's acquisition of R-Tech Ueno last year. Despite some obstacles, AMITIZA prescriptions are still going strong after 10 years on the market (Figure 2); sales are underestimated and should deliver an earnings surprise in the third quarter.

Figure 1. Sucampo Pharmaceuticals Pipeline

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Figure 2. Latest Available U.S. Prescription Figures: 727,000 for H1 2016 (3% Year-over-Year Growth)

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AMITIZA was a first-in-class chloride channel activator initially approved in the U.S. in 2006 to treat chronic idiopathic constipation (CIC); this was followed by a second indication of irritabe bowel syndrome with constipation (IBS-C) in 2008, and then opioid-induced constipation (OIC) indication in Q4 2013. Sucampo has development, commercialization and supply agreements with Takeda Pharmaceutical Co. (OTCPK:TKPYY) to develop and commercialize AMITIZA in all global markets except in Japan and China, where there are separate agreements with Mylan (NASDAQ:MYL) and Harbin Gloria Pharmaceuticals Co., respectively. Sucampo receives royalty rates ranging from 18%-26% of Takeda's net sales of AMITIZA (gross to net is capped at 20%). Other sources of income include net product sales of AMITIZA in North America, Japan and Europe and of RESCULA in Japan; research and development revenue represented by work funded by outside parties; and contract and collaboration revenue, which are amortizations of any up-front payments.

Insurance coverage in the U.S. is high, but likely not the "more than 90% of lives" claimed, since CVS/Caremark excluded AMITIZA in 2016 (although it is being added back next year). Not being on the CVS preferred formulary seems to only have dampened AMITIZA's growth by 5-10%. Takeda may have mitigated this by launching the $0 co-pay card in Q4 2015 to assist those with non-government (such as Medicare or Medicaid) insurance. Nonetheless, analysts' expectations continue to be low:$51.38 million this quarter and $55.5 million in Q4 (8.0% over Q3). Wall Street does forecast 2017 revenues of $228.93 million, which is ironically a little more than 10% over 2016. It is telling that revenue estimates for this quarter (while 53.6% higher than Q3 2015) are 1.1% less than the previous quarter.

Given that historical revenues have consistently risen from Q2 to Q3 (Figure 3), it is more reasonable to expect this trend to continue. The CVS exclusion was factored into the royalties. As a reminder, R-Tech AMITIZA sales are directly recognized since Q4, so the 40-70% YoY growth estimates in Table 1 are viable. RESCULA sales are declining. The research and development revenues will also slide with the winding down of the failed cobiprostone programs.

Finally, there is a wide variation for Mylan AMITIZA sales. The $12 million estimate is a cautionary warning due to last Q3's $10 million blip. That quarter was most likely an aberration; after all, it's only the product's fourth year on the Japanese market. The bottom line is, even if all the other income sources come in at the low end, as long as Japan sales make $15 million (a mere 2.7% above Q2), Sucampo will surpass expectations.

Figure 3. Sucampo Quarterly Revenues since AMITIZA Third U.S. Approval for Opioid-Induced Constipation

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Table 1. Revenue Estimates (in $millions) for Third Quarter 2016

Income Source

Low Estimate

Compared to Q3 2015

Compared to Q2 2016

High Estimate

Compared to Q3 2015

Compared to Q2 2016

AMITIZA Royalty Revenue

21.0

8.7%

12.1%

22.0

13.8%

17.4%

AMITIZA Sales Revenue

● Mylan N.V.

12.0

16.5%

-17.8%

17.0

65.0%

16.4%

● R-Tech Ueno

12.0

-3.2%

13.0

4.8%

RESCULA Sales Revenue

0.7

-3.0%

-49.6%

1.3

80.1%

-6.4%

Research and Development Revenue

2.3

-15.3%

-31.7%

2.4

-11.6%

-28.8%

Contract and Collaboration Revenue

0.4

4.2%

-72.6%

0.5

30.2%

-65.7%

Total Revenues

48.4

44.7%

-6.8%

56.2

68.0%

8.2%

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Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in SCMP over the next 72 hours.

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.