Smith On Stocks
) reported another strong quarter for Ofirmev, and in my mind the
only question about the launch is the magnitude of success. In this
report, I go through arguments that suggest that Ofirmev sales in a
conservative case could reach $350 million in 2018, and in an
optimistic case could reach $730 million. For perspective, Ofirmev
was launched in January of 2011 and I am estimating sales of $106
million in 2013. Of course, these estimates assume no generic
competition in that time frame
In my investment thinking, Ofirmev is only one component of what
Cadence will be in 2018. Products come and go in the pharmaceutical
business and it is the sales and marketing infrastructure in the
hospital market, which Ofirmev has enabled, that is the greatest
strength of Cadence. I think that the company will be seen as a
very attractive partner for smaller companies with hospital
products, but that lack infrastructure. I expect a number of new
products will come to the company through licensing, co-marketing
or outright acquisition of small companies that will broaden the
product offering significantly. With the marketing overhead in
place and absorbed, these can be sold through the current sales
force and gross profits can flow straight to pretax.
The great uncertainty in investors' minds that has held the
stock back and continues to be
major investment concern is a patent challenge to Ofirmev from a
small privately owned company called Exela. Perrigo (
) and Exela both challenged the Ofirmev patents, but Perrigo
reached a settlement that would allow it to enter the US market
with a generic in 2020. Perrigo is a much larger, more
sophisticated and financially stronger company than Exela. It has a
market capitalization of $12 billion and has recently made an offer
to buy Elan (
). I don't think that Perrigo decided to settle for financial
reasons, but used some calculus that suggested the odds of its
prevailing in patent litigation were not good.
To the surprise of many observers, including me, tiny, privately
held Exela has decided to soldier on. The Markman hearing on claims
structure prior to the patent trial was positive for Cadence in the
minds of some knowledgeable observers as was the trial itself.
Cadence has been willing to settle on reasonable terms to settle
the litigation, but Exela has so far refused to enter into any type
My best judgment based on the decision of Perrigo and the
Markman hearing and the patent trial is that there is a very good
chance that Cadence will prevail. However, it will ultimately be
the decision of one trial judge and there is always a chance that
Cadence could lose. The trial concluded on July 10 and my best
guess is that the final decision will be rendered in the October to
December timeframe, but it could be longer. If Cadence loses, I
think that the stock plunges to $2.00 and if it wins, it probably
goes up to $9.00 or more. At first glance relative to the current
price of $6.80, there appears to be more downside than upside.
However, I place the probability for the downside risk as being
much lower than the upside. This is why I continue with my Buy
No Doubt That the Ofirmev Launch Has Been
The initial launch of Ofirmev following its introduction in
January of 2011 was written off by many investors as being slow and
disappointing. Gaining formulary acceptance and pricing approval
was indeed an initial challenge. Perceptions began to change a year
ago as I noted in my
"Confidence for Success of Ofirmev Launch is Bolstered by Very
Strong August Results; Buy is Reiterated (CADX; $4.07)". Now
sitting here one year later, I would not term the launch as good
and probably not as excellent, but as spectacular.
The metrics in the second quarter of 2013 speak for themselves
as compared to last year's second quarter:
· Sales increased year over year by 223% to $24.7 million.
· The number of vials sold doubled to 2.2 million from last
year's 1.1 million. Since its launch in January of 2011,
approximately 10.3 million vials of Ofirmev have been sold and used
by 4.1 million to 5.1 million patients.
· Ofirmev's quarterly IV analgesic unit market share increased
to 3.41% as compared to 1.93%.
· Over 4,350 unique customers ordered Ofirmev in the 2Q, 2013, a
· Average order size increased by 27%.
· Nearly 3,700 accounts or approximately 85% of customers placed
multiple orders for Ofirmev, a 49% increase.
· The average number of orders per customer increased 10%.
· For surgical in-patients, the average number of vials used
increased by 12% to 2.7 vials.
Sequential sales performance for 2Q, 2013 versus 1Q, 2013 was
also strong. There was an increase of $1.1 million or 5%. However,
there was an unusual and non-recurring increase of $2.6 million in
1Q, 2013 from the recognition of non-recurring deferred revenue.
Taking this into account, the sequential sales increase was 18%.
Some other sequential metrics were:
· The average order size was about 100 vials, an increase of
just under 5%
· The order frequency, which is defined as the number of weeks
during the quarter that accounts order was 4.9, a 3.5%
My estimate for the second quarter was $23.3 million and the
company actually reported $24.7 million.
Management Sales Guidance for 2013 Raised
Management increased its guidance for Ofirmev sales once again.
At the end of 4Q 2012, management issued guidance for 2013 sales
for the first time of $94 million to $100 million. At the end of 1Q
2013, the guidance range was increased to $97 million to $103
million. Now at the end of 2Q 2013, the new guidance range is $103
million to $105 million. My 2013 sales estimate is $106
What Could Peak Sales of Ofirmev Be?
In the period of two and a half years, Ofirmev has garnered
roughly 3.41% of the hospital analgesic market. This market is
estimated to be about 200 to 225 million units per year; for the
sake of argument, let's call it 200 million. This market is
essentially showing no overall growth. Clearly,Ofirmev has a ways
to go in increasing market share.
I think that we can look at the current market share of the
non-steroidal analgesic ketorolac as a proxy for Ofirmev's
potential. It is the only other significant alternative to opiates
in the marketplace and has a 15% market share. However, it has the
very serious side effect issue (actually a black box warning) that
it increases bleeding. This is obviously a major drawback for use
in surgery patients. Ofirmev and ketorolac are used in combination
to further reduce opioid use and there are many situations in which
Ofirmev would be preferred over ketorolac. I think that it is
reasonable to look for Ofirmev to capture 10% to 20% of the market.
This would suggest peak unit sales of 20 to 30 million.
Ofirmev was introduced at a very attractive price in order to
help it gain initial market acceptance and is currently priced at a
wholesale acquisition price of $13.18 versus $10.75 when it was
launched; the net or actual price after discounts and rebates is
probably 10% lower. It initiated the first price increase in July
of 2012 and raised the price again in January of 2013 and July of
2013 so that the price relative to one year ago is up 23%. This
magnitude of price increase is insignificant to the hospital in
most situations. Assuming the use of four vials per patient
(current average is 2.7), the cost of Ofirmev in a surgical
procedure is $47.00, and the price increase over the last half year
has been about $8.00. The surgical DRGs that Ofirmev is involved in
can be anywhere from $10,000, $20,000 and up. Ofirmev's cost is not
even a rounding error for hospitals. I think that this gives
Ofirmev good, but not unlimited pricing flexibility. Assuming 6%
annual increases in price, the WAC price in 2018 would be
All of this thinking enables a back of the envelope estimate of
peak sales, which I will arbitrarily take to be 2018. The
assumption of a 10% market share in 2018 of a 200 million unit vial
market would result in sales of 20 million vials. The assumption of
a WAC price of $17.65 and a net price of $15.89 results in a peak
sales estimate in 2018 of $350 million. I think this is a
I think that an optimistic case would be that unit sales reach
20% of the market and that annual price increases are 9% per year.
This would produce 40 million units at a WAC price of $20.28 and a
net price of $18.25. This would result in 2018 sales of $730
I would lean more to the optimistic than the conservative case.
My current annual sales assumptions for Ofirmev are 2013 ($107
million), 2014 ($158 million), 2015 ($224 million), 2016 ($315
million), 2017 ($378 million) and 2018 ($435 million).
Notes on the Patent Litigation
I believe that the only question about the Ofirmev launch is the
magnitude of its success. I discount bearish arguments on the
launch. However, the bears still can claim that these sales
estimates are just an exercise in futility as Ofirmev will lose the
patent trial with Exela and this will result in generic competition
in 2014 or 2015 that will devastate the price and sales of
The last day of the Exela trial was July 10, 2013. Cadence
continues to say that it would settle on reasonable terms, which
presumably are in line with what recent settlements have been and
that would pass Justice Department scrutiny. This might be slightly
better terms than the Perrigo settlement that would allow generic
entry in 2020. However, Exela hasn't been willing to do this. It
has spent a lot of money for such a small company and seems
inclined to see this through to the judge's ruling.
The judge assigned to the case has a reputation for moving
expeditiously and his announcement is expected in the October to
December timeframe, although in some past cases, the decision has
taken nine months or longer to render. Cadence remains willing to
settle on reasonable terms. While it is confident of its patent
position, anything can happen in the judicial process because it
ultimately comes down to the opinion of one man. Like any good
business, it would prefer certainty on outcome.
If Exela loses in the trial and the validity of the patents are
upheld, it would obviously give other potential ANDA filers pause.
They would probably have to show that their manufacturing process
does not infringe on the Cadence process and that is a hard thing
to accomplish, in management's opinion. I think that investor
concern about generics would nearly disappear.
If Exela prevails, Cadence would immediately appeal and try to
get an injunction against Exela. If there were no injunction, Exela
would be legally allowed to launch in January of 2014. However, it
would have to find a manufacturer. This would take some time and
then that manufacturer would have to build the plant and gain FDA
approval. Building the plant from scratch would be a one- to
two-year project and management is not aware of any company making
Ofirmev in quantity in countries where it is made in sufficient
quantities to supply the US market. Exela will have to find a third
party manufacturer, as it does not have the money or expertise to
build a plant on its own. Perhaps the best case for a generic
entering the market is 2016 and it might be longer. Unlike with an
oral generic in which sales often plummet 90% in the first year, I
would expect that the Exela/undetermined partner could only supply
a small part of the market and I would expect other potential
generic producers some time to build or gain access to supply. This
would result in an oligopoly of Cadence andExela /undetermined
partner. Prices would likely only be 25% lower than Ofirmev. This
is not a good scenario, but it is not a catastrophe.
If Exela and its potential partner got to the point where they
are prepared to launch, Cadence, through its agreement with
Perrigo, could launch an authorized generic. This would take away
all of the incentives that accrue to a company that is first to
file an ANDA. Perrigo would be the dominant generic supplier and
the second company coming in would have to compete on price to gain
market share. And of course, Exela and the potential partner would
have to share economics. It may not be a particularly attractive
opportunity for a potential partner with Exela.
I am long [[CADX]]. I wrote this article myself, and it expresses
my own opinions. I am not receiving compensation for it. I have no
business relationship with any company whose stock is mentioned in
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