Investment Summary and Thesis
In my report of May 31, 2012, I stated that management guidance for Ofirmev sales of $10.0 to $10.5 million for 2Q, 2012 seemed low and I was using a higher estimate of $10.5 million to $11.1 million. Cadence (CADX) just released market research data on the number of Ofirmev vials shipped in April and May. These numbers were better than I expected and by my estimates put the company on track to report about $11.3 million of sales in 2Q, 2012 which compares to the $10.0 to $10.5 million guidance. My focus on Cadence and Ofirmev at this point is very much on the near term. I think that if the April and May trends continue into June and beyond that the Ofirmev launch may be seen to be hitting an upward inflection point that the bulls have been waiting for.
I continue to recommend Cadence stock. My current projections call for Cadence to achieve profitability at about $140 million in sales and this could occur in mid-2014.
Bears will almost certainly respond that even if the launch starts to gain traction, the stock has pending problems with generic competition. An ANDA was filed against Ofirmev in June of 2011 just five months after its launch and bears maintain that a generic launch could come as early as 2013. I would point out that the early filing does not necessarily signal that the potential generic competitor has a strong case. It has become a routine practice of the generics industry to file an ANDA shortly after almost every product launch.
There is a reason why it took 40 years to develop an intravenous form of acetaminophen; it is very hard to do as it is relatively insoluble in water. The innovations that enabled an intravenous product to be manufactured were not trivial and are the basis of the manufacturing and formulation patents that cover Ofirmev until 2017 or 2018. There are good reasons to think that they are novel, non-obvious and defendable. I also think that bears are wrong in predicting a rapid meltdown in sales as is commonly seen with oral drugs when generic competition does eventually arise (probably in 2017 or 2018). I expect a flattening or slowing of sales at that time for reasons that I explain in a later section of this report.
How I Arrive at Ofirmev Sales Projections
I find it to be a major positive when companies are prompt in releasing meaningful metrics about their products. It is a sign of confidence, of course, but it also helps analysts to determine how their projections are tracking. Cadence regularly releases data from the market research firm Wolters Kluwer that estimates the number of vials of Ofirmev that have been sold in a given month.
The company just made available the Wolters Kluwer numbers for April and May and I have compared these to the estimates in my most recent report in which I estimated that vials sold would be 326,560 in April and 350,600 in May. The actual Wolters Kluwer numbers were 319,702 and 385,403. Investors want to see strong sequential growth in vials sold. Comparisons to April and May of 2011 are relatively meaningless as Ofirmev was in just the second quarter of its US launch. For the record, the year over year increase for April was about 900% and for May was 700%.
During the first quarter conference call, Cadence issued guidance for 2Q, 2012 sales of Ofirmev that was disappointing relative to expectations, added to concern about the Ofirmev launch and resulted in pressure on the stock. In a report issued on May 31, I stated that management guidance for 2Q, 2012 Ofirmev sales of $10.0 to $10.5 million seemed low and showed my analysis that suggested that sales could come in at $10.5 million to $11.1 million.
My analysis is based on an estimate of sequential month over month growth in vials sold. To arrive at my 2Q sales estimates I was using an estimate that each month of the second quarter would experience a sequential increase of 24,000 vials. The actual rate for April was 17,142 and for May it was 65,701. The average of these two months was 41,000 vials. If I assume that June also shows an increase of 41,000 in vials shipped over May, I arrive at an estimate of 1.13 million vials being shipped in the quarter. This translates into $11.3 million of Ofirmev sales in 2Q, 2012 which compares to management guidance of $10.0 to $10.5 million. This would be a meaningful upside surprise and signal that the rubber is hitting the road with the Ofirmev launch.
What The Pharmacists are Doing
I have discussed in prior reports that pharmacists have proved to be a high and unexpected hurdle to broad adoption of Ofirmev 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 it 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 that it took to get Ofirmev to the surgical floor and would just give an opioid.
In a discussion with management, they related that their salesmen are seeing an easing in the resistance of pharmacists. Pharmacists are growing more comfortable with the way that Cadence is promoting the product and physicians are using it, i.e. for a short period of a day or so when patients are unable to swallow the oral dosage form of acetaminophen. Salesmen are also reporting that the product is increasingly being stocked on the surgical floor.
The Patent Situation
Ofirmev is protected by two key patents. Management believes that the strongest patent is a formulation patent that expires in August of 2017. However, a pediatric extension adds six months of exclusivity until February 2018. There is also a process patent that extends until June of 2021. It was not disclosed which patent the generic company is challenging, but it is probably both.
Cadence and Bristol-Myers Squibb maintain that Ofirmev's patents are so broad that it would be very difficult for a generic company to engineer around. They believe that the formulation patent covers all excipients needed to produce the Ofirmev formulation. They maintain that in order to bring a generic form of intravenous acetaminophen to market without infringing their patents, the generic company would have to develop an entirely new formulation and manufacturing process.
The Bristol-Myers/Cadence process is the only one that has ever resulted in a stable intravenous formulation of acetaminophen. It seems unlikely that a generic firm has suddenly discovered an entirely new formulation and manufacturing process that doesn't infringe when others have failed for decades. Had anyone else identified a suitable process for stabilizing IV acetaminophen, they would have used that technology to create an intravenous acetaminophen long ago.
In addition to the reasons that I previously discussed that suggest the patents may be viable, there is also a manufacturing angle that could be a barrier to widespread generic competition. Currently, there are only two manufacturers in the world who can produce Ofirmev in large volumes. They are Bristol-Myers Squibb in Europe and Baxter in the US. Both are under long term contract with Cadence and Bristol-Myers Squibb is also the licensor of Ofirmev to Cadence.
Management believes that if a company wants to manufacture a generic to Ofirmev, it or some other company would have to build a "greenfield" facility. Based on the experience with Baxter when it did this in the US, it takes about three years from breaking ground until FDA clearance can be gained and it is a significant investment. If a company started right now, it would take about three years so that a generic company following this route could enter the US market in mid-2015. However, there is no indication of anyone doing this and it is likely that they would wait for the resolution of the litigation between Cadence and the generic competitor before starting to build a plant. This could push the timeline out another year until 2016 or longer for manufacturing capacity to become available if Cadence loses the patent challenge.
When oral drugs go off patent, there is a headlong rush by numerous generics to enter the market causing major erosion in price and volume for the brand name product. This is because supply of active drug ingredient is readily available to the generic companies. It is unlikely that significant supply will be available when Ofirmev goes off patent as is generally the case with injectable drugs. Instead of a 70% erosion of sales in the first year, I would expect that there would be only a flattening or gradual erosion of sales. With only Cadence and one or two generics in the market, there is not the incentive to slash prices. The second company in the market can maximize sales by maintaining price levels and gaining market share in what is very likely to be a growing market.