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Expert Financial Analysis and Reporting

Cadence Pharmaceuticals Ofirmev Has Gained Traction Producing Upside Surprise in 2Q, 2012

I reiterate my Buy recommendation on Cadence. The Ofirmev launch has now gained traction as just reported 2Q, 2012 revenues of $11.1 million exceeded guidance of $10.0 to $10.4 million. Management guidance for 3Q, 2012 of $13.7 to $14.2 million is better than the existing Street consensus of $13.6 million. The metrics for gauging the launch showed impressive sequential increases for the second quarter over the first quarter.


The reported second quarter sales and EPS along with comments on the impressive increases in metrics used to judge the success of the launch goes a long way toward dispelling the bearish view that the Ofirmev launch is disappointing and that the company will have to raise more capital. My model shows Cadence reaching profitability in 4Q, 2013 and at that time I project it will have $68 million of cash on its balance sheet.


My Ofirmev sales projections for 2012, 2013 and 2014 are $51.6 million, $123.4 million and $227.0 million respectively. I am projecting fully taxed EPS of $0.50 in 2014 (the first year of meaningful profitability). The actual EPS that Cadence could report in 2014 could come in at $0.73 as Cadence will have operating loss carry-forwards to offset taxes. In late 2013, I think that the P/E ratio place on fully taxed EPS projected for 2014 could range from 15 to 20 resulting in a one year price target of $7.50 to $10.00.


The second part of the bear argument is uncertainty on the patent covering Ofirmev. How the Street comes to view the patent outlook will greatly impact the P/E ratio accorded the stock. Bears argue that even if the launch starts to gain traction, the stock has pending problems with generic competition. An ANDA was filed against Ofirmev in June of 2011 just five months after its launch and bears maintain that a generic launch could come as early as 2013. Cadence has sued the generic challenger and the trial date for this case is May 2013. I would point out that the early filing does not necessarily signal that the potential generic competitor has a strong case. It has become a routine practice of the generics industry to file an ANDA shortly after almost every product launch.


There is a reason why it took 40 years to develop an intravenous form of acetaminophen that is the basis of Ofirmev; it is very hard to do as acetaminophen is relatively insoluble in water. The innovations that enabled an intravenous product to be manufactured were not trivial and are the basis of the manufacturing and formulation patents that cover Ofirmev until 2017 or 2018. There are good reasons to think that they are novel, non-obvious and defendable. I also think that bears are wrong in predicting a rapid meltdown in sales as is commonly seen with oral drugs when generic competition does eventually arise (probably in 2017 or 2018). I expect a flattening or slowing of sales at that time for reasons that I explain in more detail in my report of June 22, 2012.

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