Expert Financial Analysis and Reporting

Investment Overview

The launch of Intermezzo began on April 4, 2012 and so far, it has been disappointing for investors. Purdue and Transcept (TSPT) have just announced a major new stage in its commercialization strategy that I believe may be the tipping point for a significant upward inflection in sales and I believe that this an opportune time to buy Transcept. A major new direct to consumer advertising campaign has begun. In addition, Purdue announced that Intermezzo will soon be detailed by its experienced and highly effective pain specialist sales force of 525 people. This will likely lag the beginning of the DTC campaign.

At the time of launch of Intermezzo the stock was selling at around $11.00 per share. Disappointment with the sales ramp resulted in a steady downtrend in the stock price until it reached a low of $4.40 on November 16^th. News of the new marketing effort has led to a slight rebound in stock price to a recent price of $5.24.

My gut feel is that the new marketing campaign will cause a meaningful inflection in sales that will become evident in 1Q, 2013 and the stock price will move in accordance. I am not offering a precise estimate for 2013 sales of Intermezzo until I get a better idea of the effect of the marketing campaign. I do think that Intermezzo is a very good product for an unmet medical need and my prior estimates of $250 million in peak sales still seems reachable.

Currently, prescriptions are running at a rate of 1300 per week which translates into annualized sales of about $13 million. Some street analysts who closely follow the stock are projecting about $30 million of sales for 2013 which works out to be an average of 3000 prescriptions per week. I think that weekly prescriptions will have to reach a level of more than 3000 in 1Q, 2013 for me to feel that the DTC campaign and new sales rep push is "moving the needle" on Intermezzo sales.

Overview of Intermezzo

Intermezzo is the first and only prescription sleep aid that has been shown clinically to be safe and effective for use by patients at the time they awake in the middle of the night (this is abbreviated as MOTN) and have difficulty returning to sleep. As a sufferer of MOTN, I well understand the problems of this disease. If I self-medicate with an OTC antihistamine product, I wake up in the morning groggy and disoriented. If I take nothing, I am either tossing in my bed for hours or playing solitaire on my computer. For me, there is a need for a good middle of the night product and. I have been told that the product will soon be available with my heath care plan and I look forward to getting a prescription.

Intermezzo was developed by Transcept and licensed to Purdue Pharma for commercialization in the US. Intermezzo uses the same active ingredient, zolpidem, as the widely used and now generic Ambien. This leads some people to question if there is any difference between just breaking an Ambien tablet in half and Intermezzo. I believe there are major differentiations in Intermezzo's package insert that highlight the differences from generic Ambien. First of all, Intermezzo has an indication for MOTN which Ambien does not. The recommended dose is 1/6th to 1/3rd of the Ambien dose and the Intermezzo dose is gender specific; women require a lower dose than men. The sub-lingual delivery system importantly provides rapid absorption, so much so that the package insert recommends that the patient be in bed when they take Intermezzo.

The Initial Launch

One of the new paradigms of biotechnology is that most launches are frustratingly slow and initially disappointing. Managed care has set up major roadblocks to slow the uptake of new drugs. It often takes months to gain a presence on the formularies of managed care. Also, physicians have become more risk adverse to new drugs due to concerns about side effects. Many sit back and wait to see what kind of experience first physician movers have before trying a new drug on their patients. Even then, they use the product in just a few patients and it takes time before they begin to widely prescribe the product to other patients.

I believe that Purdue had anticipated the issues with managed care and learned from the experience of others that they placed initial focus on gaining formulary acceptance of Intermezzo. Most investors feel and it is evident that Purdue and Intermezzo agree that the key to commercial success for Intermezzo is direct to consumer advertising. However, the timing of when the campaign should begin is a critical issue. Purdue has taken nearly eight months to detail the product build physician awareness and to get the product on formularies. The intent was to avoid having patients go the doctor and asking for Intermezzo without the physician knowing what the product is and/or not being able to get reimbursed.

New Marketing Campaign

Purdue has decided that now is the time to fire their big gun. They are breaking with a new Intermezzo DTC strategy in which they will spend $29 million over the next six months. In addition Purdue soon will be deploying its 525 pain specialist sales reps that are the crown jewel of the company to promote Intermezzo. Previously, it was being promoted with about 275 contract reps. The 275 contract reps have been winnowed down to 90 who have been most effective in promoting Intermezzo. Transcept is contributing $10 million of the $29 million DTC campaign. The substantial new commitment on the part of both companies signals their belief that Intermezzo has significant commercial potential despite the slow launch.

The DTC campaign will begin with print and Internet advertising in the remainder of 2012 and expand to television in early 2013. This is intended to increase consumer awareness, and motivate them to go to their physicians to ask about Intermezzo. I also think that physicians are consumers and will respond to this ad campaign. Bringing in the Purdue pain specialist sales force is also important as there is significant co-morbidity between pain and insomnia. Purdue is also opening a new website called MyIntermezzo.com.

The $29 million DTC spend is a substantial amount that can be put in context by comparing it to spending on other DTC campaigns as measured by Kanter Media. This amount of spending will place Intermezzo in the top ranks of spending campaigns. In the six month period covering 2Q, 2012 and 3Q, 2012 Pfizer spent $36 million on Viagra; Pfizer and Boehringer Ingleheim spent $32 million on Spiriva; and Merck spent $28 million on Gardasil.

Not too long ago, television was awash with DTC campaigns on insomnia drugs as Sanofi was promoting Ambien CR, Tanabe Rozerem and Sepracor Lunesta. These were going on at the same time. The result was that capturing share of mind was very expensive. Intermezzo does not face this fierce competition as the only current competition is from a downsized campaign for Lunesta.

Some Statistics

There are estimated to be 3 million Americans that suffer MOTN. Intermezzo is priced at $6.45 per pill and with 30 doses per prescription the cost of each prescription is $193.50. At a consumption rate of one pill per week, patients would consume 1.7 prescriptions per year and this suggests an addressable market of $1 billion. At a consumption rate of three pills per week, each patient would consume 5.1 prescriptions per year and the addressable market would be $3 billion.

Recent prescriptions as measured by IMS have been trending upwards gradually and reached about 1300 in the week ending November 2. These 1300 prescriptions translate into $250,000 of sales per week or an annualized run rate of about $13 million. I think that Wall Street is projecting Intermezzo revenues of $30 million for 2013 which represents an average of 3000 prescriptions per week in 2013. Prescriptions should build throughout the year so that early in the 2013 they would be less than 300 and later in the year would be more.

The question is what rate of prescriptions would excite investors in 1Q, 2013. I would guess that if the DTC campaign can create prescriptions of 3000 per week or hopefully more in the quarter that analysts would raise their sales estimates and this might be seen as an upward inflection in sales. Another important question is how Purdue and Transcept view the results. At 3000 prescriptions per week, the annualized revenues would be running at $30 million. However, if Purdue and Transcept are spending $29 million in a DTC campaign plus the expense of the Purdue sales force, the companies would have to see annualized sales of perhaps $60 million or 6000 prescriptions per week to continue to pour this type of money into the product.