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Somaxon, soon a buy-out target?

|Includes: Somaxon Pharmaceuticals, Inc. (SOMX)

With the FDA's decision due on the 21st of March Somaxon is getting a lot of attention lately.
On January 21, 2010, Somaxon Pharmaceuticals, Inc. (“Somaxon”) issued a press release to provide an update on the company’s New Drug Application (“NDA”) for its product candidate Silenor ® (doxepin) for the treatment of insomnia.
The FDA agreed that this would be considered a Class 1 resubmission with a two-month review cycle. 
From the Form 8K of 22 January we can clearly interpret that the only remaining efficacy issue going into the meeting was related to the robustness of sustained subjective sleep maintenance efficacy in non-elderly adults with primary insomnia. This "efficacy issue" was the main topic for the meeting with FDA on 21 January which gave the chance to Somaxon's CEO Pascoe to jointly with the FDA senior staff review the pre-meeting briefing package that contained the necessary info and data requested by the FDA. As a result of this meeting the FDA:
- accepted the resubmission of the pre-meeting briefing package as a "complete" response to their Complete Response Letter
- agreed that this would be considered a Class 1 resubmission with a two-month review cycle.
- saw no need for any additional safety or efficacy data.

Class 1 resubmissions are not lightly given by the FDA and in view of past experience and statistical evidence, there is a very high probability that FDA will approve Silenor this time around. Worst case scenario, FDA could limit it's approval to usage of Silenor for elderly adults only, but this represents the majority of the potential users.
Doing an elaborate research via the internet I found that Class 1 resubmissions are extremely rare as there were only 10 cases (2.5%) over the last 7 years, on a total of over 400 Class 1 and Class 2 resubmissions. According my research for none of these 10 cases approval was denied.

Company ticker

Product

Class 1 Resubmission

FDA decision

Outcome date

BMRN

Aldurazyme

28 Jan 2003

Approved

30 April 2003

CLGY

Cellegesic

5 May 2005

Approved

7 July 2006

INSM

iPLEX

12 Oct 2005

Approved

12 DEC 2005

ALKS

Vivitrol

17 Febr 2006

Approved

13 April 2006

SHPGY

Daytrana

29 Febr 2006

Approved

7 April 2006

ENCY

Thelin

15 June 2006

Unresolved*

 

ADLR

Entereg

8 Febr 2008

Approved

22 May 2008**

JAZZ

LUVOX

28 Dec 2008

Approved

28 Feb 2009

AMAG

Ferumoxytol

12 May 2009

Approved

29 June 2009

SPPI

Zevalin

20 July 2009

Approved

4 Sept. 2009

*Pfizer acquired Encysive and intended to further follow-up this NDA with FDA.  In the meantime Thelin has been approved by EMEA in Europe and according past press releases, is still expected to be approved by the FDA.
**The review time for ADLR’s Entereg was extended beyond 2 months because of some “Risk management issues” 

Of course, the decision is in the hands of the FDA and investors can only hope that the FDA will give an OK this time.


What's next for Somaxon and Silenor?

1) The M&A landscape in the pharma sector:

Recently, the M&A activity in the pharmaceutical sector has picked up again, just a few days ago there was the case of OSI Pharma.
A recent article from Turner Investment Partners states as follows: 
"The primary motivation for all of this M&A activity is that the big drug companies need to make acquisitions to compensate for the expiration of key product patents between 2010 and 2015; they are teetering on the edge of what Wall Street analysts call a "patent cliff" over the next six years. The drug companies are losing patent protection on more than 30 "blockbuster" drugs, i.e., drugs with annual sales of at least $1 billion, and generally have been unable to come up with comparable replacements. In short, the pharmaceutical companies have apparently concluded that the most cost-effective way to avoid falling off the patent cliff is via acquisition. In our judgment, the rate of M&A activity will probably pick up over the next 15 months, with most of it involving relatively modest acquisitions. For Big Pharma, the benefit of buying a number of smaller companies (as opposed to engaging in mega-deals) is that it helps them to diversify their risk and gives them more chances to replenish their evaporating drug pipelines.
Fortunately for them, it appears an opportune time to make acquisitions. The stock valuations of biotechnology companies, among others, are markedly lower now than they were earlier in the decade. Plus, more than a few small companies urgently require substantial infusions of cash to help finance the expensive process of developing new drugs; research and development can cost $800 million or more to ready a drug for submission to the Food and Drug Administration (FDA)."
http://www.turnerinvestments.com/index.c...
Another recent article "Big Pharma, Risky Business" published on the internet ( http://www.economist.com/daily/chartgall... ) tells us:
" Expiring patents are a bitter pill for drug companies. A RECORD number of drug patents will expire over the next few years, which should heighten competition from generic drugs and force down prices. In 2009, $26 billion of sales were at risk from patent expiries. This will nearly double in 2011 according to EvaluatePharma, a consultancy. The price of any given drug falls by more than 85% within a year of a patent expiring in markets like America. About 13% of global drug sales are at risk from generic competition over the next two years. Big Pharma has yet to come up with more blockbusters that will compensate for lost revenue and may look to generic drug companies to repair up a damaged business model."

2) The insomnia drugs market:

*Blockbuster drugs:
In 2007 the major anti-insomnia drug producers spent $619 million advertising Ambien CR, Lunesta and Rozerem, producing $2.7 billion in sales in the US only (info marketdataenterprises.com) . According “Visiongains” market info, the world market for sleeping disorders drugs generated $7 bn in revenues for 2008. Ambien, Ambien CR and Lunesta have been known as major blockbuster drugs but are losing that status because of expiring patents and market take-over by generic alternatives. Both Ambien and Lunesta as well as Sonata are “GABA receptor binders” which have had quite some negative press due to safety issues and side effects 
**Insomnia drugs with a smaller market share: Rozerem, from Takeda works in a different way, by binding to melatonin receptors in the brain, helping to modulate the sleep-wake cycle. However, Rozerem also has not been found to maintain sleep and garners only $100 million in sales annually. Takeda, which has already been given marketing approval in the United States, was defeated in Europe: The advisory committee to the EMEA recommended last May not to grant it a marketing license. Rozerem’s patents in the US are currently challenged by Watson Pharmaceuticals.
Circadin, approved by EMEA in Europe is not free of side effects either.
***Figures for 2008 gave the following market share:
  • Ambien CR 13%
  • Ambien 2%
  • Ambien Generics 44%
  • Lunesta 9%
  • Rozerem 2%
  • Sonata 1%
****Other and future insomnia drugs:
In March of 2007, Merck (MRK, Fortune 500) and its Danish partner Lundbeck dropped the experimental sleeping drug gaboxadol because of safety concerns. 
In 2009, Neurocrine Biosciences’ Indiplon and Sanofi-Aventis’ Ciltyri®, were rejected by FDA or voluntarily withdrawn. Transcept’s Intermezzo and Actelion’s Almorexant had both set-backs about safety issues and more studies and work will need to be done before these can be approved which will cause quite some delay.
The drug makers threw in the towel not long after the FDA announced a safety warning for the entire class of anti-insomnia drugs, based on reports of patients sleep-driving, sleep-eating and sleep-sex while under the influence of these drugs - with no memory of the actions afterward. The FDA also warned of allergic reactions and facial swelling.
The warnings apply to all the sleeping drugs that are currently on the market, including Ambien from Sanofi-Aventis, Sepracor's Lunesta, Sonata from King Pharmaceuticals and Takeda Pharmaceuticals' Rozerem. All these drugs, except for Rozerem, are addictive and work by sedating the patient. Rozerem works by controlling the internal sleep-wake cycle.
Edluar, from Meda Pharmaceuticals was recently approved by the FDA and is the first available under-the-tongue formulation of zolpidem tartrate, which is the active ingredient of Ambien. Considering the side-effects of Ambien, I don’t expect this one to become a blockbuster.

3) The future of the US insomnia drugs market:

Marketdata enterprise forecasts this market to grow to $3.7 bn by 2012, while in March 2009 Sepracor’s Chief Financial Officer David Southwell said he expects the US market to eventually grow to $5.5 billion because of the new drugs and large number of insomniacs who go untreated.

4) Silenor, the potential new insomnia blockbuster drug:

The sleeping market needs a new class of pills, safer and more officious, that allows for a sound sleep, for the whole night!
What makes Silenor so attractive for the major pharmaceutical companies with established marketing and distribution networks?
  1. It stands out from the current insomnia drug because of it’s Unique Mechanism of Action : Silenor’s active chemical is Doxepin, a potent antagonist that appears to selectively affect histamine at the H 1 receptor without a clinically relevant impact on other neurotransmitter systems.
  2. Differentiated Clinical and Safety Features 
  3. Only non-DEA scheduled product to treat sleep maintenance insomnia.
  4. No clinically relevant evidence of next day residual effects.
  5. Not DEA scheduled; no abuse potential or risk of dependency.
  6. No GABA-related side effects.
  7. Comprehensive IP Protection , patent protected for use in insomnia through 2020.
  8. Formulation exclusivity with patent protected key excipient.
  9. Multiple new patent applications related to formulation and label.
  10. Somaxon is potentially easier to take over in view of its limited staff number, little infrastructure and no existing marketing or distribution agreements. 
What is the potential market share for Silenor:
As mentioned above, Silenor has all necessary features to become the new insomnia blockbuster drug! If in the hands from a powerfull international pharmaceutical, it could aim for 20% of the market within 3 years!
As a way to compare:
In its first year after introduction to the US market, Sepracor achieved sales of $329 million. More than 213,000 doctors wrote 3.3 million prescriptions for it last year, the company said (http://www.nytimes.com/2006/02/07/busine...
In 2008, 3 years after its market introduction Lunesta sales increased to $600 million.
In a recent interview with BNET Richard Pascoe mentioned: We believe there is ample room for a new agent such as Silenor in the market, particularly one with a highly differentiated mechanism of action, a strong clinical efficacy profile, and a favorable safety and tolerability profile characterized by the its non-scheduled status, adverse events comparable to placebo, and a lack of GABA-ergic (gamma-amino butyric acid) related side effects commonly experienced by patients who take the marketed products.
Our market research revealed that 67 percent of all patients currently on an Rx insomnia therapy reported that they aren’t satisfied with their current treatment [and] more than 56 million people self-medicate with OTC therapies primarily out of fear of the unwanted side effects associated with those Rx treatments . 
Another poster on this MB sated info from the market study: 9 out of 10 doctors said if Silenor was approved they would use.
A market study executed by a third party on demand of Somaxon revealed that Silenor could achieve peak sales of >$500 million/y

Our valuation of Somaxon, only if the FDA approves Silenor:
I made my NPV calculations based on the following knowledge, and assumptions:
We know that:
a) In its first year after introduction to the US market, Sepracor achieved sales of $329 million. More than 213,000 doctors wrote 3.3 million prescriptions for it last year, the company said (http://www.nytimes.com/2006/02/07/busine...
b) In 2008, 3 years after its market introduction Lunesta sales increased to $600 million.
c) Independent third party analysis has resulted in estimated peak annual sales for Silenor exceeding $500M.
d) Patent protection is valid till 2020 but we can expect some new insomnia drugs such as Actelion's Almorexant to enter the market in 2014 (Europe)and 2016 (US)

Assumptions A:
1) FDA approves Silenor for elderly population only, resulting in potential coverage of 60% of the insomnia drug market for adult + elderly. We count on a conservative market share up to 10% at peak
2) We foresee 65% gross profit, but have to take into account vigorous marketing/advertisement costs
3) We only consider sales in the US and the rest of the world will be bonus (because US patents and FDA approval doesn't open the door immediately to other markets) 
4) We expect cash flows Y1 through Y7 of respectively 120, 240, 240, 180, 150, 120 and 60 million
An NPV calculation with a discount rate of 20% will show you a potential cash buy-out value of >$600 million

Assumption B)
1) FDA approves Silenor for both populations, resulting in potential reach of 100% of the insomnia drug market for adult + elderly. We count on a conservative market share of 10%
2) We foresee 65% gross profit, but have to take into account vigorous marketing/advertisement costs
3) We only consider sales in the US and the rest of the world will be bonus (because US patents and FDA approval doesn't open the door immediately to other markets) 
4) We expect cash flows Y1 through Y7 of respectively 250, 500, 500, 400, 250, 200 and 100 million
An NPV calculation with a discount rate of 20% will show you a potential cash buy-out value of >$1.2 billion

Please note that I didn't take any potential tax benefits into consideration.

 


Disclosure: Long