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Expert Financial Analysis and Reporting

Cadence: Patent Settlement With Sandoz Increases Confidence That Ofirmev Will Have Exclusivity Through December 6, 2020 (CADX, $10.98)

On January 30, 2014, Cadence (CADX) announced that it had entered into a settlement agreement with Sandoz to resolve pending patent litigation in regard to Ofirmev. Cadence has granted a license to Sandoz that allows that company to launch a generic on or after December 6, 2020. Cadence has two patents covering Ofirmev in which the longest lasting would expire on December 6, 2021 (assuming pediatric exclusivity is gained).

On November 15, 2013 Cadence received the best possible news on a trial judge's decision on a patent challenge against Ofirmev. The U.S. District Court for the District of Delaware ruled in favor of Cadence in the company's patent infringement lawsuit against Exela Pharma Sciences. You may recall that a significant number of bears argued that Exela would prevail and there would be generic competition in 2014 or 2015. In terms of the impact on the stock this was tantamount to having a successful outcome in a key phase III trial. The stock has doubled from $5.88 to $11.29. Happily, I have been on the right side of this stock move.

The market has obviously concluded that the Ofirmev patent is solid, but there are still a few wounded bears tweeting about continuing ANDA challenges from Sandoz and Fresenius and warning about other ANDA challenges to come. In reiterating my Buy on Cadence at this new price level, I recently told my SmithOnStocks subscribers that while there were continuing ANDA challenges, the history for such challenges after a successful patent defense strongly suggests that the other ANDA filers will try to reach a settlement with Cadence that will give them certainty on when they will be allowed to market their generic.

There may be some noise on remaining ANDA filers, but I think this patent challenge issue is behind us and the decision of Sandoz, which is a strong generics player, to settle is a strong affirmation of my position and I think that other ANDA filers will follow. There is actually a strong incentive for the generics companies to delay their entry to allow Cadence to build sales levels. If you were a generics company, would you rather launch a generic in 2021 into a $600 million market or launch a generic in 2015 into a $250 million market. This is not to say that this is the reason that Sandoz settled; the upholding of the patents was most likely the major issue.

Ofirmev now has clear exclusivity through December 2020 and this makes it an extremely valuable and reasonably long-lived asset. I love the management of this Company. They have executed a launch of Ofirmev that can only be described as brilliant; it is one of the most successful launches of a new product by an emerging company in the last five years. Ofirmev reached about $101 million of sales in 2013 and management has guided to $$173 to $177 million in 2014; this was above the consensus estimate of $170 million.

Ofirmev currently has about 4% of the hospital injectable analgesic market and management has suggested that obtaining a 15% share is achievable which would lead to peak sales of $400+million. I believe that bulls on the stock may be thinking that peak sales will approach $400+ million. I think that the share could go significantly above 15% and Ofirmev could reach peak sales of $600+ million in 2020. The 15% benchmark is the same level reached by an earlier non-opioid analgesic Toradol that is plagued by side effect issues-bleeding in particular. In comparison, Ofirmev is as effective and much safer and should enjoy much broader use.

The key to great success for Cadence in the long term is using its highly effective hospital sales force as an inducement to bring in new products through licensing or acquisition. This can be a highly effective strategy comparable to that employed by Santarus (SNTS) and Jazz (JAZZ), two extremely successful companies and stock investments. Cadence could also be a potential takeover target, but I think that management wants to do more than just cash out.

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