Expert Financial Analysis and Reporting

Intermezzo was launched by Transcept’s marketing partner Purdue in April 2012. I believed then and now that it is a highly effective product and fills a unique niche for middle of the night insomnia. Sales in 2012 were disappointing, but Purdue stepped up in major way to relaunch the product late last year with a direct to consumer advertising campaign and the decision to use their 500+ analgesic sales force to market the product. I thought that this would reinvigorate the product. My analysis was wrong and I am withdrawing my Buy recommendation. The launch is a failure.

A brief post mortem of the situation suggests a number of things that I misjudged. It has been difficult to make physicians and patients aware that middle of the night awakening was a disease condition and had a new effective therapy. Managed care barriers were much more difficult to surmount than I had expected. They put up roadblocks to getting Intermezzo on formulary and placed it on tier 3 which included $45 to $50 co-pays. Purdue tried couponing which could reduce the co-pay to $15, but even though Intermezzo is a superior product, it just couldn’t dislodge generic Ambien which costs pennies per dose.

Prescriptions initially picked up with the DTC campaign and increased sales rep promotion. However, they have recently flattened. It is obvious that the launch has failed. Royalties in the first quarter received by Transcept in the first quarter were $0.5 million which translates into just a few millions of Intermezzo. Management was clearly downbeat during the conference call on Wednesday, May 8. They indicated that they would use the Company’s strong balance sheet to acquire new assets that were not defined.

So what does an investor do with the stock? The Company has $81 million of cash on its balance sheet and no debt. The cash per share is $4.31 which is more than the current stock price of $3.59. The inherent burn rate of $5 million suggests that the Company could end the year with $66 million of cash or $3.51. Street sources tell me that the analysts at Cowen and Lazard have both reiterated their buys on the stock although JMP Securities and Leering went from outperform to neutral. I think that in the near term there may be downside.

There are a number of positive things that can happen in 2013 that could have an impact on the stock. Transcept might be able to acquire products or even a company that has bright prospects as many small private and public companies are in a cash bind and need access to cash and the public markets. I think it is likely that Purdue will return Intermezzo to Transcept and Transcept might be able to develop a low cost marketing approach that could eventually lead to a much smaller than expected, but still profitable product. Finally, I think that the management of Transcept is seasoned, highly capable and will make the most of this situation.

While recognizing that there could be the potential for significant upside surprise from these factors, this was not the reason that I recommended the stock. Hence, I am throwing in the towel, selling my stock and moving on.