Cadence needs fast-paced Ofirmev launch to build confidence

(This article corrects a previous version which included an inaccurate price for Ofirmev.)

For a company that has just launched its first product, Cadence Pharmaceuticals is not getting much investor love. On the Nasdaq stock exchange the company’s shares are the most heavily shorted in the pharmaceutical space – a huge 40% have been sold short – suggesting big bets are being placed on a fall.

Since the company's intravenous pain reliever Ofirmev won FDA approval last November, Cadence shares have dropped 18% (Market marches to different beat following Cadence approval, November 3, 2010). A dilutive fundraising just six days later has not helped, but the bigger issue appears to be nagging doubts over Ofirmev's potential - specifically whether the intravenous acetaminophen can win converts in hospital formulary-setting panels, which will be key to its success.

Investment case

Ofirmev’s chief clinical benefit is achieving relief from pain and fever, whilst reducing opioid consumption and thus avoiding side effects such as nausea, vomiting and constipation. As a sign of the FDA’s views of Ofirmev’s relatively benign nature and well known safety profile, the therapy was approved with no requirement for a risk evaluation and mitigation strategy or any black box warnings, a rare occurrence these days.

As such, the California group is hoping that hospital pharmacy and therapeutic (P&T) committees will adopt the new formulation, and has taken on a sales force of 147 sales representatives and 13 field medical science liaisons. In January the company gave a target of achieving on-formulary status at 800 to 1,000 hospitals by the end of 2011, which represents half of the IV analgesic opportunity.

Current consensus sales estimates appear to affirm the company’s narrative, putting 2011 sales at $26m and reaching $503m in 2016, according to EvaluatePharma data. Those estimates yield a net present value of $383m, somewhat limited by Ofirmev’s patent expiry in 2017. The company shares were trading at $7.35 today, giving the company a market value of $372m.

Askance view

A compelling story, perhaps, but it is one that investors have yet to embrace. For one, many are looking to the experience of Cumberland Pharmaceuticals’ IV ibuprofen Caldolor, which has struggled following its FDA approval in 2009. Analyst consensus forecasts for the NSAID for 2016 more than halved during 2010, from $329m to $142m.

The second argument is the intrusion of generics, both in competitive products and in IV acetaminophen. Cadence has set a price for Ofirmev at more than $10 a vial, a price that exceeded some analysts' expecations; IV morphine will be available much cheaper.

In the best of times, products aimed at the hospital market have slow uptake because the P&T process can take time as its members digest data and make a decision. But with hospitals facing cuts in public health care programmes and many uninsured patients not receiving coverage under health care reform until 2014, P&T committees are more sensitive to costs, says Irina Rivkind, an analyst with Duncan-Williams.

Furthermore, a patent expiry in 2017 means Cadence needs sales to ramp up quickly in order to achieve maximum potential – and with a sales force of its scale running $32m-$48m a year, Ofirmev needs to generate cash sooner rather than later. In fact some investors fear that a competing IV acetaminophen product might be able to reach the market as a generic sooner than the 2017 patent expiry, according to analysts.

Tight timeline

Analysts from Ladenberg Thalmann are forecasting that Ofirmev will only begin to break even in 2014, and with patent expiry coming three years after that, it does not leave much time for Cadence to make money on the product.

As of September 30, 2010, Cadence had $60m in cash. That was before the $100m share offering in November, of course, but it also precedes the addition of the sales force and the $15m milestone Cadence owes Bristol-Myers Squibb, which markets IV acetaminophen in Europe under the name Perfalgan. BMS does not reveal sales figures for Perfalgan.

Initial demand for Ofirmev will be closely watched - the product was only launched in January but Cadence's comments will be scrutinised when it reports fourth-quarter results next month.

Investors are taking a pessimistic stance so far; a strong launch is needed to reverse these views.

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