Cadence Pharmaceuticals: Ofirmev Sales Could Produce Upside Surprises In Coming Quarters

| About: Mallinckrodt PLC (MNK)

Investment Thesis

I believe that Ofirmev, Cadence's (CADX) intravenous formulation of acetaminophen, has significant potential as an alternative to intravenous opioids and non-steroidal anti-inflammatories analgesics that are used broadly in the hospital. This potential is well illustrated by the launch in the U.K. where Ofirmev is branded as Perfalgan. In its first year of introduction Ofirmev/ Perfalgan captured 2% of the U.K. injectable analgesic market. By 2009 it had captured 35% of the U.K. market, with 75% of its use being in combination with opioids; a principal therapeutic objective of Ofirmev is to reduce opioid consumption. In 1Q, 2012, Ofirmev just one year after its introduction captured 1.41% of the U.S. injectable analgesic market. If it follows the same rate of penetration in the U.S. as in the U.K., by 2017 it would reach sales of around $600 million.

Cadence has been a poor performer over the last nine months as the Ofirmev launch that began in January of 2011 was slower than expected by both investors and management. This resulted in management having to raise $77 million in 4Q 2011 to maintain sufficient capital to get through the launch period with an adequate cash balance. The company was also forced to restructure to reduce costs. Both of these moves were alarming to investors and contributed to significant pressure on the stock.

During the first quarter conference call, Cadence issued guidance for 2Q 2012 sales that were slightly disappointing relative to expectations and added to concern about the Ofirmev launch and resulted in further pressure on the stock. My analysis suggests that management guidance of $10.0 to $10.5 million for Ofirmev sales in 2Q 2012 is conservative and I am projecting a range of $10.5 million to $11.1 million. I think that if I am right and 2Q Ofirmev sales surprise on the upside, it could trigger a round of upward revisions in sales estimates for 2012 and beyond. This could be the catalyst for renewing investor confidence that Ofirmev has the potential to be a major product and result in a sustained upward move in the stock. I recommend purchase at these levels.

My specific sales estimates for Ofirmev project 2Q 2012 sales of $11.1 million, 3Q of $14.7 million and 4Q of $18.8 million. This would result in full year 2012 sales of $52.7 million which compares to $11.5 million in FY 2011. Interestingly, my 2Q 2012 sales estimate nearly equals sales achieved in all of fiscal 2011. The annualized run rate by the end of the year could reach $75.3 million by my estimates. I think that the rubber is hitting the road with the Ofirmev launch. The calculations supporting these estimates are laid out in a more detailed report on my website.

Metrics for Gauging Ofirmev's Growth

In 1Q 2012, 2,700 hospital accounts had placed as least one order for Ofirmev, a 20% sequential increase from 4Q 2011. Originally, Cadence had targeted a universe of 1,700 accounts so that hospital penetration is going significantly better than expected. Approximately 2000 accounts or 75% of active customers placed multiple orders; this was a 26% sequential increase. This was despite a product recall in January that caused a supply disruption that may have had a negative impact on orders shipped. Average order size increased sequentially by 16% in the first quarter.

Given this already high penetration, the rate of increase in the number of new accounts placing orders is likely to slow in the future. Ofirmev now has broad reach within the hospital so that the key to growth lies in improving "same store" sales through increasing the number of patients being treated and the number of doses they receive. Currently, it is estimated that the doses per patient are about 2.0 to 2.5, but the potential is believed to be on the order of 4.0 to 6.0.

The sales process within the hospital following formulary approval begins with the anesthesiologist, who is usually the first physician specialist to adopt Ofirmev; this is the Cadence sales rep's initial focuses. Promotion next expands to surgical specialties and emphasizes colorectal and bariatric surgeons who tend to be treat patients' pain for a longer period of time. The progression from anesthesiologist through surgeons and staff leads to more vials consumed per patient. The anesthesiologist is usually responsible for the first dose that is given during or after surgery. Then surgery and hospital staff accounts for the second, third and fourth doses as the patient progresses through the recovery room and onto the general floors.

Initial Stumbling Blocks are Being Overcome

Acetaminophen in an oral dosage form is used everywhere in the hospital because of its safety and efficacy, but until Ofirmev there has been no intravenous version because of formulation issues that made it difficult to keep acetaminophen in solution. Ofirmev is the first and only successful intravenous formulation of acetaminophen after 60 years of unsuccessful development efforts by the pharmaceutical industry. If fills a significant unmet need in the hospital.

Patients in the operative and post-operative settings often are not able to swallow a pill and even if they can swallow, absorption from the gastrointestinal tract can be poor making the oral dosage form ineffective. Such patients have been treated with IV non-steroidal anti-inflammatories and opioids, but these products have issues. The NSAIDS cause gastrointestinal bleeding and carry a black box warning. The opioids cause constipation, sedation, nausea, vomiting, respiratory depression, cognitive impairment and headache. The general determinant of when a surgical patient can leave the hospital is when they can move their bowels so that reducing opioid consumption can lead to less constipation and shorter hospital stays. Also, opioids negatively affect the functioning and mobility of patients, making care more difficult for the nursing staff.

Ofirmev is an easy sell to doctors and nurses and the thinking of the company and investors was that this would result in a quick launch. However, the initial ramp in sales was disappointing. During the first three quarters of introduction over the January to September 2011 period, there was a large bolus of formulary approvals. However, this did not translate into immediate demand because of unexpected bureaucratic delays in implementing the formulary approvals. Beyond the formulary process, there were additional committees involved in determining how the product would be used in the hospital; these created bureaucratic delays. Cadence feels this issue has largely run its course.

The pharmacist proved to be a high and unexpected hurdle to broad adoption in the hospital. They bear responsibility for the pharmacy budget and feared that the ubiquitous use of oral acetaminophen at a penny per pill would be replaced by vials of Ofirmev costing $10 per vial. After all, many hospital patients have an IV line and it is almost as easy to connect Ofirmev to that line as to give a pill. They were narrowly focused on this potential cost issue for the pharmacy and were not balancing this against the potential positive effect on overall costs due to improved safety, shorter hospital stays and reduction in opioid use.

The initial demand from physicians was sometimes purposely blunted by pharmacists who were afraid that Ofirmev would bust their pharmacy budget. In some cases, a tactic used was to stock Ofirmev in the central pharmacy. In order for the physician to use Ofirmev, it had to travel from the central pharmacy to the point of care and a surgeon was not willing to wait for the ten to twenty minutes it could take in getting Ofirmev to the surgical floor.

Cadence has focused its marketing efforts throughout the hospital to educate all personnel on the cost and medical advantages of Ofirmev over opioids and NSAIDS. It has made a special effort to convince pharmacists that the product will only be promoted for use in the operative and post-operative setting to replace IV opioids and NSAIDs. This is easing the concern that a substantial number of oral doses of acetaminophen will be switched to Ofirmev. The sales force is also working with surgeons to stock Ofirmev in the operating room or in the satellite pharmacy on the surgical floor.

Disclosure: I am long CADX.