Expert Financial Analysis and Reporting

Investment Conclusion
Today’s announcement that Cadence (CADX) has entered into a settlement with Perrigo (PRGO) on patent litigation regarding Ofirmev is a positive. Uncertainty over the patent situation of Ofirmev has been a dark cloud over Cadence’s stock. This settlement is encouraging, but Cadence still has another generic challenger to deal with in Exela Pharma Sciences. Until this situation is resolved there will continue to be uncertainty.

It has been my position that the most likely case is that Cadence will reach a patent settlement that will allow generics to enter the market in 2017. At that time, I think that the erosion of sales will not be like the dramatic declines that are seen with oral branded products. Injectable products are more expensive to manufacture and it takes time to build capacity that usually leads to a less dramatic decline. I continue to recommend Cadence on this basis. However, this development raises the possibility that generic competition may not begin until some period beyond 2018.

My position is not consensus on the stock. The most strident bears argue for generic entry in 2014 with significant erosion of Ofirmev sales. The uncertainty between my optimistic assessment and the bear case scenarios keeps most investors on the sidelines.

Patent Settlement with Perrigo
Cadence announced that it had entered into a settlement with Perrigo in regard to pending patent litigation involving Ofirmev. Litigation remains ongoing against a second company, Exela Pharma Sciences. Ofirmev is covered by two patents listed in the Orange Book. The first is 6,028,222 that covers the formulation of Ofirmev and with the pediatric extension lasts until February 15, 2018. The second is 6,992,218 covering manufacturing of Ofirmev and which expires on December 6, 2021 with the pediatric extension. I think that these patents are strong and defendable, but until the courts rule, there is no certainty.

According to the agreement, Perrigo has the right of first refusal to negotiate an agreement to market an authorized generic version of Ofirmev in the U.S, if Cadence decides to do so. Perrigo also has the non-exclusive right to market a generic intravenous acetaminophen product in the U.S. under Perrigo’s ANDA, after December 6, 2020 or at such a time as the patent(s) covering Ofirmev is ruled invalid. Perrigo will purchase product exclusively from Cadence and will pay Cadence for product costs plus an administrative fee, as well as a royalty payment based on the net profits achieved by Perrigo.

This settlement with Perrigo is a positive step in resolving the patent uncertainty that is overhanging the stock, but it does not put the matter to rest. However, I believe that the first paragraph IV notification challenging Ofirmev patents may have been from Exela. If so, it holds first to file status that entitles it to the coveted 180 days of marketing exclusivity relative to other generics. However, Cadence doesn’t know who has first to file status and this won’t be known for sure until the FDA makes a final determination. Cadence will probably have to also strike a settlement with Exela in order for investors to have certainty in knowing when generics might come to market.

The patent challenge trial with Exela is scheduled to begin in May 2013. There could be a settlement between now and then in which Cadence and Exela agree on a certain date on which the generic can enter. I think that Cadence is confident of its patents and is willing to fight to the finish on defending them. However, Cadence has shown the propensity to settle and there is the possibility of a settlement with Exela. This would take away uncertainty on the patent situation as one never can be fully confident of any trial outcome. If a settlement is not reached, the decision of the court would likely not issue before 1H, 2014.

It is difficult to determine why Perrigo entered into this agreement. It may signal that it believes that both the 222 patent and the 218 patent have a reasonable chance of being upheld, which would afford protection through 2020. However, Perrigo has the right to market a generic following the 180 day exclusivity period, if Exela prevails in the trial. Perrigo may just be letting Exela do the heavy lifting. Another important inducement is that Perrigo will not have to make significant investments in plant and equipment at such time as Ofirmev goes generic; it can use Cadence’s manufacturing resources.

From the standpoint of Cadence, this was an opportunity to reach a very favorable settlement with what I believe to be the far stronger of the two patent challengers, as judged by infrastructure and availability of capital. It will also assure a participation in the sales and profits of the generic marketplace at such time as Ofirmev does go generic. It also may put more pressure on Exela to settle as the threat of an authorized generic means that Cadence could allow Perrigo to launch an authorized generic at any time. This would make the 180 day period of exclusivity less valuable.