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Expert Financial Analysis and Reporting

Cadence: Management Guides to a Near Doubling of Ofirmev Sales in 2013 (CADX, $5.23)

My confidence in my long standing Buy recommendation on Cadence (CADX) has been strengthened by its pre-announcement that 4Q, 2012 sales of Ofirmev surprised on the upside. For the last half year, I have been writing that the Ofirmev launch has gained traction. The evidence is becoming solid as the company pre-announced that 4Q, 2012 sales of Ofirmev came in at $17.1 million. This compared to prior guidance of $15.9 to $16.4 million given by the company and a consensus analyst expectation (as complied by the company) of $16.3 million. This was in spite of a negative impact on sales to key hospital accounts in New York, New Jersey and Connecticut in the aftermath of Hurricane Sandy.

For the first time, the company has issued full year guidance as it projects that 2013 Ofirmev revenues will reach $94 to $100 million. This signals that management now has confidence in the sales trajectory of Ofirmev. I think that there is a possibility for further upside surprises as I doubt that management is using its most aggressive expectations in providing this guidance. The guidance of $94 to $100 million of sales in 2013 represents a near doubling of the 2012 sales of $50 million. My current estimate is $101 million.

The stock was hurt early last year by concern that the launch of Ofirmev, which began in January 2011, was disappointing and even a failure. I think that this concern can be put aside now and I think that management's credibility because of its adroit handling of the Ofirmev launch has increased significantly.

The company has one more important issue to work through and that is the generic challenge to Ofirmev. In November 2012 Cadence reached a settlement with Perrigo in which Perrigo (PRGO) agreed not to launch a generic until 2020. The generic firm with first to file status on Ofirmev in the US is believed to be Exela. For reasons that I explained in detail in an earlier report , I think that Exela has pressure to settle on similar terms. The patent litigation trial is scheduled to begin in May 2013 and based on experiences in prior cases, I think we might see a settlement in 1Q, 2013. If Exela agrees to not enter the market until 2020 like Perrigo or even to enter in 2018 or 2019, I think we will see a sharp spike in the stock. The most stringent bear argument has been that Exela will prevail in the trial and launch a generic in 2014.

I believe that sales of Ofirmev are on a strong upward trajectory. Sales in 2011 were $11 million and $50 million in 2012. My projections for 2013, 2014, 2015 and 2016 are $101 million, $168 million, $237 million and $332 million. I project that the company will be cash flow positive in 4Q, 2013 on sales of $39 million; my model shows that the lowest cash position will be $45 million in 3Q, 2013 and by 4Q, 2014 cash levels will reach $77 million. If I am correct, there is no need for further financing to execute the Ofirmev launch.

The company has tax loss carry-forwards that could shield profits through 2016. My untaxed EPS estimates for 2013, 2014, 2015 and 2016 are ($0.34), $0.21, $0.65 and $1.20. My price range target for 2015 is $12 to $16 based on an estimated P/E ratio of 17 to 22 applied to 2016 adjusted EPS of $0.73, which is my estimate of what EPS would be if fully taxed. All of my sales and EPS projections assume no generic competition before 2017.

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