Cumberland cracks open IPO window

It may not have been the grandest of ceremonies to mark the opening of the IPO window that some investors may have wished for, but specialty pharma company Cumberland Pharmaceuticals achieved a significant feat in pushing the window ajar, which had been nailed shut for almost two years, with a public listing yesterday on the Nasdaq.

As EP Vantage recently highlighted when considering the prospects of Talecris Biotherapeutics gaining a public listing (Talecris to test IPO waters?,July 29, 2009), there has been an increasing sense that IPOs may be possible in the second half of the year, but only for companies with products already on the market, generating healthy revenues and profits. With $35m in sales last year from two products, with a third drug about to be launched, and five consecutive years of annual profits, Cumberland certainly fits the profile of a suitable IPO candidate in the current economic climate.

Modest opening

Cumberland sold five million shares to the public at $17 per share, slightly lower than the original estimate range of $19-21, generating net proceeds of $75m and which values the company at around $290m. The shares were largely flat on the first trading day, slipping slightly to $16.83 at the close, although they jumped up to $17.60 in after-market trading.

These relatively modest valuations and are significantly lower than the $1bn predicted public offering should Talecris go down the same route, but are in keeping with a company that has quietly but effectively evolved with minimal external cash requirements since its inception in 1999.

Before the IPO, almost two-thirds of Cumberland’s shares were owned by nine directors or executive officers of the company, with chief executive officer, Mr Kazimi, by far the biggest single shareholder owning 48% of the company. The only significant source of external finance from a venture capital firm was from SCOUT Healthcare Fund, which held 6.6% of Cumberland.

Funds for portfolio expansion

Cumberland currently has two specialty products on the market, Acetadote launched in 2004 for the treatment of acetaminophen poisoning and Kristalose, a prescription strength laxative acquired and re-launched by the company in 2006. Acetadote is the Cumberland’s lead product with sales last year of $25.4m.

However, following FDA approval in June for Caldolor, the first intravenous formulation of ibuprofen in the US for the treatment of pain and fever, the company is preparing to launch in the fourth quarter this year and expects the drug to rapidly become its biggest selling product.

In terms of market potential for Caldolor, Cadence Pharmaceuticals’ Acetavance, an intravenous formulation of acetaminophen which has been filed with the FDA to treat pain and fever, provides an insight. Assuming Acetavance receives FDA approval in November, analysts have forecast annual sales of the drug to reach $366m by 2014. Considering that Cumberland’s market value of $290m is eight times higher than total revenues of $35m last year, it is clear that Caldolor represents a significant portion of the company’s value, so investors will be keeping a close eye on uptake of the product.

As such, Cumberland has earmarked some of the IPO proceeds to support Caldolor’s launch and expansion of its hospital sales force. In addition, the company has stated a desire to expand its product portfolio through acquisitions and will also use some of the cash to reduce its current debt burden of around $7m.

Drought to flood?

ARYx Therapeutics was the last US-based pharmaceutical company to successfully IPO, back in November 2007, while Italy’s MolMed was the last to achieve the feat in Europe with a public listing in March 2008.

Cumberland’s successful IPO follows an aborted attempt two years ago at the twelfth hour, having set a price range of $14-16 per share. Abandoned IPOs became common place in the second half of 2007 and the first half of 2008 as the credit crunch started to bite hard.

However, global stock markets have recovered significantly since the lows in March this year – for example the Nasdaq biotech index is up 30% - and recent weeks have seen a sudden surge in equity offerings from the likes of Human Genome Sciences, Onyx Pharmaceuticals and Seattle Genetics as investor confidence in the sector appears to be returning.

Cumberland’s IPO therefore seems to have been timed quite nicely, particularly as some commentators are wary as to how long the recent upturn will last.

As to whether Cumberland has opened the floodgates for more IPOs it is probably still too early to tell. At the moment the most likely successes are expected to come from companies who have signalled their IPO intentions in the past with S1 filings but which have been on hold or withdrawn, and who also have similar profile to Cumberland, namely sustainable revenues and profits from marketed products (Who else could follow Cumberland on to the stock market?, August 12, 2009).

Until a traditional pure play biotech, without any marketed products and recording multiple years of annual losses, manages to float, the IPO window looks likely to remain only ajar.