Cadence Pharmaceuticals: Good For Patients, Bad For Investors

| About: Mallinckrodt PLC (MNK)
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Recently approved Ofirmev, an intravenous form of acetaminophen from Cadence Pharmaceuticals (CADX), has the potential to change how pain is managed in post-operative patients that are NPO or “nothing by mouth.” The primary patient population that will benefit from Ofirmev are those undergoing gastrointestinal procedures such as bowel, bariatric, and even a selected population in orthopedics. The primary beneficiaries of this drug are patients and clinicians, but will be painful for investors.

The Good (Mostly For Patients)

The primary benefit from Ofirmev is pain control with less opiod usage. Opiods such as morphine and fentanyl can cause negative adverse effects – namely, respiratory depression, sedation, and constipation – that can require adjunctive therapy to mitigate side effects, delay patient recovery, and prolong hospital stays.

Comparisons with current pain products such as Caldolor (intravenous ibuprofen) by Cumberland Pharmaceuticals (NASDAQ:CPIX), IV ketorolac, and even rectal acetaminophen are misguided. In many cases, Caldolor and ketorolac are not the best options to use in patients undergoing surgery for many reasons, some of which are increase bleeding risk, sedation, dizziness, and gastrointestinal side effects such as abdominal discomfort – exactly the same side effects that clinicians try so hard to minimize in post-operative patients. There are also concerns with using these agents in patients with renal or cardiovascular dysfunction. Rectal acetaminophen or suppositories can be an option in NPO patients, but often not the best choice. The kinetics - absorption and distribution - of rectal acetaminophen are variable and unpredictable. Not only that, the rectal suppository form is a discouragement for many patients and clinicians.

Third quarter results showed Cadence has made progress in advancing the utilization of Ofirmev in hospitals and by clinicians. Notable are:

· Greater than 1,400 hospitals have added Ofirmev to formularies or 60% of the targeted U.S. IV analgesic opportunity.

· 1,500 hospitals are projected to have Ofirmev on formulary by year-end.

· Net product revenue increased 105 percent form second quarter, from 1.7 million in the second quarter to 3.5 million in the third.

· Increase in frequency of orders. Average order frequency among the 1200 of the approximately 1800 customers that stock the product at the end of the second quarter increased 65 percent.

· Increase in average order size of 21 percent in existing customers.

· 200,000 patients have been treated with Ofirmev for the first 9 months of product launch with an average of 2.5 vials per patient. Cadence wants to increase vial usage to 4-6 per patient.

· At the end of September 30th, 2011, the company has sold greater than 560,000 doses.

The Bad

Cadence made great progress in navigating the bureaucracy in formulary adoption in the target hospitals. However, adoption does not automatically translate into sales. When drugs are added to a formulary, it has to be selected and prescribed by clinicians. Formulary acceptance has to be looked at as a first step in a successful launch, not the step. Ultimately, investors should not gauge the success of Ofirmev by the number of hospital formularies it has penetrated, but by the actual utilization. Although there are positives in the third-quarter results, the company is still losing money and with a patent set to expire in 2017, Cadence has a small window of opportunity to sell Ofirmev. At this point, there has not been a strong indication that Ofirmev can sell fast enough to justify an investment in Cadence.

To complicate matters, there has been a strong trend to use less acetaminophen in patients among clinicians and most importantly, the FDA. In fact, by January 2014, all opiod-acetaminophen combinations available by prescription will contain no more than 325 mg of acetaminophen per tablet or capsule. Currently, acetaminophen is commonly found in 500 mg acetaminophen-opiod combinations, but as high as 750 mg per tablet or capsule. This decrease is consistent with recommendations of setting daily acetaminophen limits to 2 to 3 grams instead of the current standard of 4 grams. This represents a 25 to 50 percent reduction in the daily limit of acetaminophen.

The Ugly

With only one drug, Ofirmev, in the pipeline, a patent set to expire in 2017, and current patent challenges by Exela and Paddock Laboratories, Cadence has a number of negative events looming over it. The first patent expires August 5th, 2017 or 6 months after that if pediatric exclusivity is granted. Successful challenges from either Exela or Paddock will significantly shorten the patent duration and introduce a flood of generic IV acetaminophen shortly thereafter.

Cadence is still a money-losing operation and investors have to expect additional dilution as seen with the recent share-offering announcement. With the share price significantly lower when compared to 6 months ago, Cadence may experience periodic pain relief, but the long-term prognosis does not look good and may require chronic pain control. Ofirmev is good for patients, but bad for investors.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.