Flamel Technologies: Bloxiverz Competition To Cease Marketing

| About: Avadel Pharmaceuticals (AVDL)
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BLOXIVERZ (neostigmine methylsulfate) shortage resolved.

The FDA removes unapproved products.

The FDA approves VAZCULEP in a surprise early move.

In June, the FDA indicated the neostigmine methylsulfate shortage had been resolved.

Recent public evidence that unapproved formulations of neostigmine will no longer be marketed after September 30, 2014 sets the stage for market dominance for Flamel's (FLML) FDA-approved BLOXIVERZ for the next few years.

I believe BLOXIVERZ pricing flexibility could drive earnings power of $1.00-2.00 for Flamel in 2015 and 2016. Earnings power should become apparent next quarter.

On June 20, 2014, Flamel stock was up sharply in heavy trading on the news that the FDA resolved a long-running shortage of supply in the neostigmine methylsulfate market when it updated its drug shortage website to indicate the shortage for the drug had been resolved. At the same time the agency noted that the shortage of neostigmine had been resolved, it eliminated any reference to competing unapproved products and listed Flamel's BLOXIVERZ as the one and only supplier of FDA-approved neostigmine methylsulfate. While there was no public mention of enforcement action in the Federal Register, the fact that the FDA no longer referred to the other unapproved products on the drug shortage website and its guidelines that it will typically remove unapproved product from the market in approximately one year from the approval date of an NDA (5/31/2013) led many investors to believe that the FDA had notified the companies privately that they had to wind down inventories and prepare to leave the market entirely at some future date. This was cleared up today for me, when I learned that Cardinal Health, a distributor of West-Ward Pharmaceuticals' unapproved formulation of neostigmine, had updated its National Drug Code information to indicate that neostigmine methylsulfate supplied by West-Ward would no longer be available for marketing after September 30, 2014. I have embedded the link to the webpage where I found this information on HIPAASpace.com.

I believe that this new information is clear public evidence that the neostigmine competitors to Flamel's BLOXIVERZ were told to cease marketing of their products by the end of September. From channel checks, I estimate that there was approximately six weeks of inventory of unapproved product in the channel and as much as six weeks of inventory in-process at the two unapproved manufacturers. As this inventory is wound down, I would expect Flamel's BLOXIVERZ, as the only remaining player, to continuously gain this share, and I conservatively project more than 50% share by September 1 and close to 100% share by the end of that month. I would emphasize that my market share projections may be conservative, as a call I placed into two leading wholesale distributors this morning indicated that they no longer had any unapproved product available, less than two weeks after probable FDA action. While the companies sell directly to large customers under preexisting contracts and there are a plethora of distributors, I believe this may be somewhat indicative of already tightening supply conditions.

While I may be off a few weeks on the timing of the inventory drawdown, I am pretty certain that Flamel's BLOXIVERZ will be the only neostigmine product on the market after September 30th and that the product is truly transformational for the company, as the drug should drive annual earnings power of $1.00-$2.00 per share beginning in the fourth quarter and in 2015 and 2016. Based on my discussions with industry experts and a review of drug pricing during periods of market dominance, I believe that BLOXIVERZ could generate revenues of approximately $150 million in 2015 and more than $200 million in 2016, with peak revenues of $250 million later that year. Neostigmine methylsulfate is used to reverse the muscular blocking agents following surgical procedures that require anesthesia. It is a critical drug that must be used, and therefore does not require much of a selling effort, and Flamel is able to sell the drug with just two employees, who are mainly responsible for order entry and supply management. As such, margins are quite high in the 65-70% range, after manufacturing costs and royalties tied to previous owners of a Flamel subsidiary of 20%.

The company's recent FDA approval of VAZCULEP (phenylephrine hydrochloride), which will be launched in 3Q2014, should add nicely to earnings growth during the 2015-16 period. VAZCULEP is the second approval of a grandfathered unapproved product by Flamel. Phenylephrine is a vasoconstrictor which acts through stimulation (agonist) of the alpha-1 adrenergic receptor. The product is available as an injectable solution for IV infusion. It is primarily used for the treatment of hypotension associated with anesthesia.

Earnings growth should accelerate beginning in late 2015, when the company is expected to launch the third and fourth products from the unapproved but marketed portfolio. Flamel is using the substantial cash flow from these products to fund development of several potential very attractive products using Flamel's drug delivery technology, and has a very rich pipeline with numerous upcoming catalysts. The most valuable programs are the once-daily sodium oxybate program and the abuse-deterrent opioids program. Clinical data on the once-daily sodium oxybate program for narcolepsy is the first of a series of programs using Flamel's proprietary drug delivery technology that should provide significant value to shareholders over the next two years. Flamel reported positive clinical results with its sodium oxybate program, and is advancing two higher-dose formulations (marketed by Jazz Pharmaceuticals as Xyrem) which could offer better efficacy, safety and convenience. Flamel's once-daily product could use an accelerated 505 (B)(2) regulatory pathway, putting it well ahead of Jazz's once-daily program. I believe the significant value inherent in this program went largely unnoticed by investors, and I also believe the company could monetize the value of the program by partnering with a larger pharmaceutical company with an existing CNS/sleep disorder franchise.

We should also see clinical data late this year on the company's trigger-lock program for abuse-deterrent pain medications, which targets a multi-billion dollar market opportunity. I also expect clinical data on the company's long-acting OTC pain medication in August and on the OTC respiratory product in 4Q. While these OTC programs are smaller opportunities, Flamel can complete pivotal trials for the pain product by the end of next year using the 505 (2) pathway. I believe a low-double digit royalty is possible on both OTC programs.

I believe fair value for FLML shares is $22, based on a multiple of 15 on our 2015 EPS estimate of $1.50 per share. This valuation rests solely on BLOXIVERZ and, to a much lesser extent, VAZCULEP revenues, and does not include any value for the proprietary pipeline or nearly $200 million in net operating loss carryforwards, although we believe they could contribute meaningfully to the valuation over the next couple of years. We believe that the stock could appreciate 40%-50% over the next couple of months, once the true earnings of BLOXIVERZ and the pipeline become apparent to investors.

The risks to the shares are similar to most specialty pharmaceutical companies, but I believe the regulatory risks are mitigated by the fact that the company has more than 10 programs in its development pipeline, most of which are an improvement on existing drugs and utilize the regulatory 505 (2) pathway or target currently marketed but unapproved products. The fact that the company has so many programs under development also helps to substantially diversify the risk.

Disclosure: The author is long FLML. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.