Somaxon Pharma in Bed With Procter & Gamble

by: Daniel Long

Somaxon Pharmaceuticals (NASDAQ:SOMX) announced on Wednesday, August 25, that Procter & Gamble (NYSE:PG) will be co-promoting the company's only drug, Silenor. Silenor was approved by the FDA in March of 2010 for the treatment of insomnia characterized by difficulty with sleep maintenance. Somaxon will likely transform from a development stage company to one with actual revenues during the last quarter of this year as Silenor is slated to launch in late September. We take a look at how the deal with Procter and Gamble is structured, how Silenor is different from other insomnia drugs, and what kind of revenues the product could bring in for Somaxon.

The Agreement with P&G will double Silenor's sales and marketing reach to 35,000 high prescribing doctors of insomnia products. P&G exited the pharmaceutical business last year to focus on its core business, but retained 15% of that division's sales force. Those individuals will be primarily focused on Silenor. P&G's sales force will engage primary care and other high prescribing physicians, as well as 25,000 pharmacies, while Somaxon's smaller force will be able to focus primarily on specialists and other physicians who treat insomnia. There was no money exchanged in the deal and both parties will maintain their own sales force. P&G will not be responsible for any other costs to commercialize the product, and Somaxon insists that it will maintain long term control of Silenor. They will pay P&G fees and royalties based on net sales, and company executives say that these fees will not exceed 15% of total sales. P&G was also granted first negotiation rights to market Silenor as an Over the Counter medication, although a product is not expected anytime soon.

Silenor was approved to treat a specific, although wide-reaching type of insomnia known as sleep maintenance difficulty. These are people who wake frequently during the night or wake up too early and have trouble falling back asleep. Clinical trials of the drug showed people were able to sleep through the seventh and eighth hours of the night with little or no next day residual effects. Silenor also demonstrated a lack of abuse potential and withdrawal effects, and has not been flagged by the U.S. Drug Enforcement Agency. Silenor works differently than any other FDA approved insomnia drug by binding to histamine receptors. The company believes that this differentiation will lead to advantages in a large and growing insomnia market. It is estimated that 70 million Americans suffer from insomnia, and only about 20% are currently being treated with medication.

The company faces competition form major drug companies that currently have insomnia products, and in some cases companies already offering generic versions of those products. Silenor may have an advantage over these products with effectiveness, but many more drugs are in the works that may better compete with it. Silenor is currently expected to be the first of these to reach the market, which gives them a huge advantage getting their name out there. The possibility of Silenor generating a lion's share of revenues from the insomnia market does exist, although its life cycle may be limited. P&G will help with the promotion in the short term, and also with a way to further market the product as an OTC medication as their patents expire and generic competition ensues.

The major competitors that Silenor will face if it comes to market on schedule later this year are Sanofi-Aventis' (NYSE:SNY) Ambien CR, King Pharmaceutical's (KG) Sonata, Sepracor's (SEPR) Lunesta and Takeda Pharmaceutical's (OTCPK:TKPHF) Rozerem. Sanofi-Aventis' controlled release version of Ambien, Ambien CR, did total sales in 2009 of just under $1 billion, a 14% increase over 2008. Lunseta saw sales of over 800 million last year, a 6% increase from 2008. So how big of a bite in this multi-billion dollar market will Silenor be able to swallow? It may depend on several factors, including cost. The company says that they will be selling the product for less than the average price of their major competitors' insomnia drugs. The biggest factor, however, may be whether or not any major adverse side effects are reported. The current drugs have all had their problems with side effects, the major ones being dependency and suicide risk.

Any revenues approaching a billion dollars will be enormous for this very small company. There are currently just 35 million shares issued and outstanding, giving Somaxon a market cap of around $150 million. The company is well positioned to take full advantage of any profits with no debt on their balance sheet and 55 million dollars in cash and equivalents. The company's operating expenses have remained consistently small, and Somaxon has said the P&G deal will not increase their expense forecast for the year, which is $28-32 million. Pharmaceutical companies often experience high gross profit margins in the 1-400% range, however expenses, particularly selling expenses, bring their net margins way down to an average of 15%. This could spell big net margins for Somaxon, but only if the percentage of sales given to P&G remains as low as the company says it will. Keep in mind that they have another significant sales force to pay from Publicis Touchpoint Solutions that was announced in July.

The stock popped from $4.00 to $10.00 back in March when FDA approval was announced. Over the next five months, however, it trickled back down to just below $4.00. To get an idea where the stock is currently valued, a 10% penetration into the insomnia market next year with a 25% net profit margin would give this stock a forward P/E of as low as 2. Numbers remotely close to this would almost have to send the market cap higher considering the average P/E of 28 for Drug Manufacturers. Dilution may be mostly off the table for now given their strong financial position.

Disclosure: No positions

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