Modest encouragement for Penwest


News that Penwest Pharmaceuticals has settled patent litigation with Actavis over Penwest’s most valuable drug, Opana ER, provided modest relief for long-suffering shareholders in the drug delivery company. Penwest’s shares rose 5% to $1.59 on Friday as the two companies dismissed ongoing lawsuits and reached agreement that Actavis can launch an authorised generic version by July 15, 2011, two years earlier than current consensus for Opana ER’s patent expiry.

With an estimated enterprise value of $44m for Penwest, compared to a potential net present value for Opana ER of $239m, the market currently appears to have little faith that the listed patents for Opana ER are valid and expects generics to enter the market as early as the middle of next year. As such, the Actavis settlement is encouraging, but with further challenges by Impax Laboratories, Teva and Sandoz ongoing, Penwest still has to win some more big battles if it is to eventually win the patent war over Opana ER.

Analysts downgrading but keeping some faith

Opana ER is a long-acting formulation of the strong analgesic oxymorphone, developed using Penwest's TIMERx technology and marketed by partner Endo Pharmaceuticals in the US.

Since Impax Laboratories launched its patent challenge to Opana ER in 2007 (Time for relief from Opana pain?,October 5, 2007) sales forecasts for the drug in 2012 have dropped 39%, from $428m to $263m.

At one stage analysts hoped the ‘250 formulation patent, listed in the Orange Book and not due to expire until 2022, would provide ultimate protection for Opana ER and valued the drug at a somewhat staggering $800m, or $35 per share.

However, since the patent challenges started to flood in last year, noticeably from the bigger, aggressive generics players such as Sandoz and Barr Pharmaceuticals (now Teva), analysts have significantly reduced their forecasts to account for the increasing risk of generic competition.

With rejection by the US patent office of the ‘250 formulation patent in September (Opana pain continues for Penwest, September 30, 2008) most analysts now expect generic competition to start upon expiry of two other key patents in September 2013.

Modelling the upside

With Penwest to receive 22%-30% royalties from Endo, Opana ER is currently valued at $239m, according to EvaluatePharma’s NPV Analyzer, significantly higher than the company’s enterprise value, or market capitalisation of $50m.

Adjusting the patent expiry date to May 14, 2010, when the 30-month stay related to the Impax litigation expires, causes an 82% drop in the drug’s value to $42m, or $1.31 per share; adding an estimated 50 cents per share in cash to give a total basic value of $1.81 exceeds the current share price.

Conversely, if similar deals as the one struck with Actavis can be reached with the other generic challengers and a generic version is put off until July 2011, the value of Opana ER more than doubles, to $88m or $2.75 per share.

As a result, even though generic competition to Opana ER in 2011 would represent something of a disappointment when considering the drug’s high-value history, the current lows that Penwest stock is trading at suggests this scenario would now offer a decent upside for investors.

Nervous investors are likely to stay away, however, until the outcomes of the other patent challenges, particularly by Impax which is at the most advanced stage, are finalsed, meaning the dark black cloud hovering over Opana ER and Penwest is unlikely to disperse any time soon.

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