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Expert Financial Analysis and Reporting

Confidence for Success of Ofirmev Launch is Bolstered by Very Strong August Results; Buy is Reiterated (CADX; $4.07)

Ofirmev Sales Are on a Strong Growth Track

Cadence just reported a strong increase in sequential vial sales of Ofirmev; they grew 16% sequentially in August from July. There are currently two major issues controlling Cadence’s stock price: the progress of the Ofirmev launch and generic challenge to Ofirmev. I wrote at length about these issues in an August 17 report called Cadence Strengthens on Positive News Flow.

I think that after a slow and disappointing start that Ofirmev has gained traction. Most product launches over the last few years have disappointed investors in the first year and most have continued to disappoint beyond the first year. Ever increasing hurdles set by managed care in an effort to control health care spending have been the major factor. Ofirmev is one of the few products that have been able to overcome the managed care challenge and achieve a strong growth trajectory.

There continue to be doubters as to the growth potential of Ofirmev, but I think that with the continuing strong growth trends that I project, most investors will come to believe that this is going to be a very successful product, at least from the standpoint of unit sales. The issue hanging over the stock now is the generic challenge to the Ofirmev patents. Again I would refer you to my last report (previously cited) for a detailed analysis of the intellectual property situation.

The Generic Challenge to Ofirmev

The Markman hearing on the generic challenge has concluded and seemed to go Cadence’s way. The trial is scheduled to start in May of 2013. I think that there is a good chance that the patents covering Ofirmev will bar generic competition until 2018 and possibly 2021. However, until the trial takes place and a decision is rendered, this will be a major headwind for the stock price. I would expect a court decision in late 2013 or 2014. I do not expect the generic company to launch at risk in the interim because of limited or no product supply that is available to them. I see generic completion most likely emerging in 2016.

Price Target Scenarios

Without the resolution of the patent case, I see the stock inching gradually and steadily higher as sales continue to grow impressively. I see the company reaching profitability in 4Q, 2013. I am projecting sales of $342 million in 2015 and fully taxed EPS of $1.05 in 2015 regardless of the outcome of the patent case.

The stock price in 2015 will depend on the price earnings ratio applied to the stock and this will be heavily dependent on the resolution of the patent case. If the formulation patent which expires on February 8, 2018 is found valid, I think that the price earnings ratio could be 15 times resulting in a 2015 price target of $15. If the process patent that expires on December 6, 2021 is upheld, I think that the P/E ratio applied to the stock would be much higher.

In the event that the patents are ruled invalid, I think that the headline news could drop the stock to the $1.50 to $2.00 range. My best judgment is that Ofirmev will achieve sales of $342 million in 2015, the same level I am projecting if they win the trial and there is no generic challenge. I would expect generic competition to begin in 2016 and drop Ofirmev sales to $170 million in 2016 and perhaps $135 million in 2017 and cause a measured rate of decline thereafter.

At this level of sales, Cadence would likely have positive earnings and cash flow if Ofirmev were its only product, but it is likely that the attraction of its sales force would allow Cadence to bring in other products. If all of this comes to pass, I think that investors would view Cadence in a better light and the stock should rebound off of the $1.50 to $2.00 range, the extent depending on what kind of new products are brought in. I think that there is a significantly better than 50% chance that the patents will prevail.

Cadence and the Generic Company Might Reach a Settlement

There is one other possibility and that is that Cadence and the generic company reach a settlement that allows the generic company to launch at an agreed upon date. This has the appeal of reducing uncertainty for both parties and is often the outcome of these patent disputes.

The question is what date they would agree upon. Based on my analysis, it makes no sense for Cadence to agree to let the generic company launch in 2016. It is possible that they could agree to a generic launch in 2017 and probable that they would agree to a launch in 2018. In the case of a 2017 launch agreement, I think that the P/E ratio applied to 2015 EPS could be 10+ times resulting in a 2015 price target of $10. The timing of any agreement is impossible to project with any confidence, but could come this year. I think that the stock would strengthen significantly on news of a settlement allowing for a generic  launch in 2017 or beyond.

Thoughts on Ofirmev Growth Potential

Each month, Cadence releases data on monthly vial sales of Ofirmev based on data supplied from Healthcare Analytics. The most recent data for August showed that the number of vials sold in August was 479,492, a 16% increase over July sales. This was bolstered by a 6% price increase in July. Vial shipments through August of this year and my projections for the balance of this year are shown below:

Ofirmev Unit Sales Performance
2012 Vials Sold % Increase
January 211,499 -8%
February 296,771 40%
March 302,560 2%
April 319,750 6%
May 385,043 20%
June 407,867 6%
July  413,216 1%
August  479,492 16%
September (E) 517,851 8%
October (E) 548,851 6%
November (E) 580,851 6%
December (E) 613,851 6%

Source: Cadence Pharmaceuticals for January through August and SmithOnStocks projections for September through December

These numbers are encouraging that the Ofirmev launch has gained traction after a slower than expected launch in 2011. I am estimating that Ofirmev vial sales will increase by 8% in September to 517,851. With this my sales estimate for 3Q, 2012 is $14.1 million, at the high end of the $13.7 to $14.2 million guidance of the company.

My long range projections for growth in sales, vial sales and EPS are shown in the following table. My projections are based on my studying launch trajectories for other successful hospital based products. These have been characterized by steady, linear expansion of unit growth trends.  

Sales and Earnings Projections for Cadence Pharmaceuticals
Sales Vials  EPS
$ millions % inc millions % inc
2011 11.5 1.15 ($1.41)
2012 50.7 341% 5.08 342% ($0.86)
2013 122.7 142% 11.88 134% ($0.17)
2014 224.8 83% 20.56 73% $0.49*
2015 341.9 52% 36.92 80% $1.05*

* Assumes a 30% tax rate. In actuality, net 
operating loss carry-forwards will result in no
tax payments until 2016 so reported EPS
would be higher

Tagged as + Categorized as Company Reports


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