Transcept's Intermezzo: A Blockbuster In The Making

This article is now exclusive for PRO subscribers.

Transcept Pharmaceuticals’ (TSPT) middle-of-the-night insomnia medication, Intermezzo, will exceed long-term expectations. Hasty comparisons to current insomnia products on the market are inaccurate as there are no comparable, FDA approved, medications for middle-of-the-night insomnia (MOTN). Unlike Intermezzo, current insomnia drugs on the market – Ambien/Ambien CR from Sanofi (NYSE:SNY), Lunesta from Sunovion, Sonata from Pfizer (NYSE:PFE), and generic zolpidem – are used for initiation of sleep and/or maintenance of sleep. All of the aforementioned medications have slower time of onset and the kinetics (i.e. metabolism) require that patients get at least 7-8 hours of sleep to minimize drowsiness in the morning or the “hangover” effect. On the other hand, the sublingual formulation and low zolpidem dose of Intermezzo enables the patient to fall asleep faster by having a shorter onset time and only requires that the user get 4 hours of sleep. Intermezzo will finally allow prescribers to treat patients suffering from MOTN as strong recommendations and barriers – patient safety and liability - are in place against the use of current hypnotics for MOTN. In other words, clinicians generally do not and will not prescribe current hypnotics such as Ambien or Lunesta for MOTN. Furthermore, because of the fast onset time, Intermezzo will capture market share from current hypnotics as it can potentially be used off-label for initiation of sleep.

Insomnia, especially MOTN, is a large market. Eleven million patients receive some sort of prescription for sleep and IMS estimates that, from October 2010 to September 2011, 79 million new and refill prescriptions were processed. Of the different insomnia symptoms, MOTN is the most prevalent. Studies conducted by Ohayon at Stanford University estimates that one-third of Americans suffer from MOTN awakening with 90 percent of cases persisting for greater than 6 months and 50 percent persisting for longer than 5 years.

With annual sales of 2 billion dollars for Ambien before patent expiration and Lunesta approaching one billion in 2010, the market potential for Intermezzo is substantial. Having a FDA-approved indication of MOTN and possible off-label prescribing for initiation of sleep, there is a high probability that Intermezzo can obtain blockbuster status with sales exceeding 2 billion dollars.

Transcept has selected an excellent partner in Purdue Pharmaceuticals to market Intermezzo. Purdue brings to the table marketing expertise, established relationships in target markets – primary-care physicians and pain specialists – and has committed 100 million dollars to the first 12 months of the second-quarter 2012 launch. With a sales force of over 500 reps primarily marketing two in-house products, the selling of Intermezzo will be focused and productive. Based on this partnership, Transcept expects royalties of mid-teens up to mid-twenty percent based on net sales. In addition, the agreement allows Transcept to co-promote Intermezzo with royalties of 22 percent to 40 percent based on net sales to psychiatrists and time of opt-in.

Transcept is financially sound with 54 million dollars in cash and equivalents, a burn rate of 1.5 million per month, and no debt. In addition to the recently announced 10 million dollars owed to Transcept for listing the first formulation patent in the Orange Book, the Purdue relationship provides an additional 80 million dollars based on milestones and sales. With patent coverage until 2025, patient investors banking on sales of Intermezzo will be pleased and greatly rewarded, but a more robust pipeline would further strengthen the case for a long-term investment in Transcept.

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

Disclaimer: All information is provided for informational purposes only and does not serve as investment advice or an offer of management services. There is no guarantee that the information is accurate. All information is subject to change, amendment, and correction without any notice. Any mention of current and past results does not indicate any future expectations or results. All investments are associated with risks and loss of money. Consult with a professional tax, accounting, legal, and/or investment advisor before making any investment decision.