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Alpharma (ALO)Stock (Drug Manufacturers - Other Industry, Pharma & Healthcare Industry)
Alpharma, Inc. (ALO) is a specialty pharmaceutical company with global operations in human and animal pharmaceuticals. Alpharma does business in more than 80 countries. The company struggled in 2004, based on continuing problems from manufacturing issues raised by the U.S. Food and Drug Administration (FDA) in 2003. Alpharma has since worked through the bulk of these problems, regaining FDA approval to begin solid dose and liquid formulation manufacturing. With its generic business out of the woods, the company decided it was time to divest these operations and focus more on growing its specialty pharmaceutical business. In December 2005, Alpharma concluded the sale of its U.S. and international generics business to Actavis Group for $810 million in cash. Soon thereafter, Alpharma sold ParMed Pharmaceuticals, its U.S. pharmaceutical distribution business, to Cardinal Health Inc. for $40.1 million in cash. Following the divestiture of its generic business, the company is now conducting its business through three main segments: Pharmaceuticals (formerly known as Branded Pharmaceuticals), Active Pharmaceutical Ingredients (API), and Animal Health. The API segment develops, manufactures, and markets a range of fermentation-based active pharmaceutical ingredients that are used, primarily by third parties, in the manufacture of finished-dose pharmaceutical products. Kadian Business Doing "ok" Kadian, a morphine sulfate sustained release capsule, is the lead product in Alpharma's Pharmaceuticals business. Kadian releases morphine sulfate in a smooth consistent fashion over a 12 or 24 hour period and is approved for the treatment of moderate to severe chronic pain. Thanks to the approval of several new dosage strengths, Kadian is currently available in eight dosage strengths, allowing for flexible dosing. Kadian sales in the third quarter of 2007 were $42.4 million, an increase of 22% year-over-year. Prescriptions for the third quarter of 2007 grew 8% on a year-over-year basis. Reported prescriptions include prescriptions distributed under the company's voucher program that was discontinued at the end of 2006. Excluding voucher-related prescriptions, Kadian scrips grew 12% y-o-y and 3% on a sequential basis. The company attributed the improved performance to several initiatives undertaken to drive growth for the product. Kadian is being promoted by a 194-person sales force, which has been realigned to achieve improved performance. Meanwhile, the company announced results showing that the concomitant use of Kadian with tested levels of alcohol does not have a significant impact on morphine blood levels. These results were submitted to the FDA. The FDA completed its review of the alcohol interaction data and informed the company that no further modifications are required in Kadian's label. The company intends to use the favorable alcohol interaction data to differentiate its product from Opana ER (Endo) and Avinza (King), both of which carry alcohol interaction warnings. Alpharma is also working out future manufacturing plans for Kadian. It is possible that Actavis will manufacture the product for Alpharma. This should allow for further operating margin improvement in this division. Kadian's market share remained stable in 2006 on a y-o-y basis. Total pharmaceutical sales for 2006 were $138 million, up 36% y-o-y. Alpharma expects Kadian revenues to continue growing in 2008 aided by managed care initiatives, sales force realignment, and favorable alcohol interaction data. However, we are not so optimistic about the product's growth prospects. Kadian is battling for a share in the highly competitive $4 billion pain market, and is facing stiff competition from several other extended release morphine products such as DepoDur, MS Contin, Oramorph SR, Opana, and Avinza. Moreover, roughly three-quarters of the market is flooded with generics. Even though Kadian sales increased on a y-o-y basis in the third quarter of 2007, we were disappointed to see that sales remained flat on a sequential basis. Over the past few quarters, Kadian sales have been tracking below expectations and there was a slowdown in prescription growth. We intend to keep an eye on the product's prescription trends before we become optimistic on its growth prospects. Longer-Term the Focus is on ALO-01 In order to maintain growth in the Kadian franchise, Alpharma is working on developing a second-generation opioid product, ALO-01 (formerly known as Kadian NT). ALO-01 is a combination of an extended-release opioid and naltrexone, which is added as an abuse deterrent. The naltrexone is expected to remain sequestered when the drug is used as directed. However, if the drug is tampered with, the naltrexone is expected to be released so as to diminish the euphoric effect of the drug. In late September 2006, Alpharma presented positive top-line results from a phase II multi-dose clinical efficacy and pharmacokinetic trial, which was conducted on patients with chronic moderate to severe pain due to osteoarthritis of the hip or knee. The study achieved the goal of demonstrating that Alpharma's proprietary abuse-deterrent technology for long-acting opioids does not impact the safety or efficacy of ALO-01. ALO-01 was also shown to be well-tolerated and as effective as morphine sulfate ER tablets currently available. Further data presented at the annual meeting of the American Pain Society showed that the release characteristics of ALO-01 were similar to that found in previous studies of Alpharma's currently marketed Kadian capsules. ALO-01 succeeded in maintaining pain reduction throughout the study and showed similar effectiveness to Kadian. Results showed that the sequestered naltrexone did not interfere with pain relief. In late November 2007, Alpharma reported positive results on ALO-01 from a phase III double-blind, randomized, placebo-controlled pivotal efficacy trial (n=500 ) that was conducted under a Special Protocol Assessment (SPA). ALO-01 met the primary endpoint of the trial and demonstrated significant pain relief (p<0.05). We look forward to receiving more details on the secondary endpoints and adverse events at the company's investor day. Meanwhile, an open-label 12 month phase III safety trial is currently ongoing. Data for the first six months of the safety study has been collected and will be presented at the investor day. Alpharma intends to file for FDA approval in the first half of 2008. A positive response from the FDA would allow the product launch to take place in the first half of 2009, giving the company about 10-12 months to switch patients from Kadian to ALO-01. The Kadian patent expires in April 2010. Meanwhile, Alpharma is working on setting up a research and development center for pharmaceuticals in its New Jersey facility. Once launched, ALO-01 is likely to face tough competition from several products that are currently under development. The most advanced candidate is Remoxy, an abuse-deterrent product being developed by Pain Therapeutics in collaboration with King Pharmaceuticals. King and Pain recently reported positive phase III results on Remoxy and intend to file for FDA approval in the second quarter of 2008. The NDA filing for ALO-01 is also scheduled to take place in the first half of 2008. As such, it will be a race to the market between these two products. In addition to King and Pain, several other companies like TheraQuest, Shire Pharmaceuticals (NRP 290: phase I/II), Acura / King (Acurox: phase III), and Elite have pain candidates in different stages of clinical development. Therefore, we believe the company needs to enhance its Pharmaceuticals product offering through both internal and external sources in order to drive top-line growth. But Will It Be Enough? Another matter of concern is the possibility of a generic version of Kadian hitting the market before Alpharma is able to complete the successful development of ALO-01, the follow-on formulation of Kadian. ALO-01 is in the final stages of clinical development and is not likely to hit the market before the first half of 2009. So, the entry of generic versions of Kadian before the launch of the new product would have a devastating effect on top-line growth. Until now, there are no paragraph IV filings for Kadian. Meanwhile, Alpharma has another abuse-deterrent product in development. Alpharma recently completed a phase II euphoria abatement study with ALO-02 (Oxycodone NT). Earlier this year, management reported that the study has identified the appropriate level of naltrexone needed to adequately reduce the euphoric effect of oxycodone. Pharmacokinetics studies are currently ongoing. We expect to see data soon. A "go / no-go" decision regarding the initiation of phase III trials will be taken later this year. Based on market research, the company estimates that abuse-deterrent long-acting opioids will capture about 50% of the long-acting opioid market. Although we are pleased to see the company move its pain products into late-stage development, we believe that Alpharma should look for suitable in-licensing opportunities in order to grow its Pharmaceuticals business. Thanks to its strong cash position, Alpharma is extremely capable of striking numerous product acquisitions or in-licensing deals ahead. Flector Patch We Remain Skeptical In fact, Alpharma is working on expanding its pharmaceuticals business and entered into two in-licensing agreements in 2007. On August 21, 2007 the company acquired exclusive license and distribution rights to Flector Patch, a topical non-steroidal anti-inflammatory drug (NSAID), from Institut Biochemique SA. Flector Patch is indicated for the topical treatment of acute pain due to minor strains, sprains, and contusions. The product received FDA approval in January 2007 and is scheduled to hit the U.S. market in January 2008. Alpharma intends to promote the product aggressively and is currently preparing for the launch. The company has increased its sales force to 400 persons and will be using a 200 rep contract sales team as well. We expect a significant increase in SG&A spend in the fourth quarter of 2007 and 2008 due to the sales force ramp-up and increased promotional activities. The company will be making significant investments in advertising and promotion in support of the launch. We expect to hear more on Alpharma's commercialization plans at the upcoming investor meeting in December 2007. The company also acquired rights to market Tirosint, an FDA approved gel capsule indicated for thyroid replacement therapy. Alpharma intends to launch Tirosint in the second half of 2008. Alpharma will initially focus on launching Flector Patch which is expected to contribute to earnings by the second half of 2009. The company estimates that the product can achieve peak sales in the range of $500 million. While we are pleased to see that the company is working on reducing its dependence on the Kadian franchise, we note that Flector Patch will be vying for a space in the highly competitive pain market where branded as well as several generic options are already available. We believe that the sales force will have its work cut out to carve a position for Flector Patch. With a label similar to that of other NSAIDs, and efficacy demonstrated in just two out of four pivotal clinical trials, we believe the sales force will find it challenging to differentiate Flector Patch from other NSAIDs. As such, we think the company's estimate of peak sales of $500 million might be on the high side. In fact, Flector Patch will face tough competition from Voltaren gel (Novartis), a prescription NSAID treatment that received approval recently. Voltaren will be marketed by Novartis' consumer segment. Pipeline Building is Key On September 6, 2007 Alpharma acquired exclusive U.S. rights to ketoprofen in Transfersome gel, a topical NSAID currently in phase III trials for the treatment of pain associated with osteoarthritis, from IDEA AG. ketoprofen in Transfersome gel is currently under regulatory review in Europe. IDEA is planning to conduct two clinical studies to support the NDA filing in the U.S. which is scheduled to take place in late 2009. IDEA has submitted a Special Protocol Assessment which is being reviewed by the FDA. The trials should commence early next year. The company is currently targeting a product launch in early 2011. Once approved, ketoprofen in Transfersome gel will compete with oral NSAIDs and Cox-II inhibitors. We have adjusted our model to reflect the impact of these two agreements. Alpharma is also working on developing liquid dose sustained release opioids. In March 2007, the company entered into an exclusive licensing agreement with Tris Pharma whereby Alpharma will gain access to Tris' LiquiXRTM technology. Alpharma intends to use this technology to develop an oral liquid product complementary to the solid dose form of Kadian. Alpharma intends to file an NDA for a new product in 2008. This product could be the first liquid dose sustained release opioid to hit the $40 million market, which is currently dominated by genericized short-acting products. The technology will also be used for the other products in Alpharma's abuse deterrent program. API Under Pressure / Animal Health "Ok" The company's API business has been struggling due to massive pricing pressure thanks to tough competition from Chinese API firms. Performance in this segment declined 0.2% y-o-y in the third quarter of 2007 as increases in sales of vancomycin were offset by volume declines in certain other products. The API segment posted sales of $42.6 million in the third quarter. The company expects continued growth in the vancomycin market and has entered into an agreement which should allow it to double its vancomycin manufacturing capacity. Work is currently ongoing on the expansion of manufacturing capacity. Alpharma expects to receive regulatory approval for the manufacturing site in 2008. However, new competition for vancomycin, which has been the main contributor to API segment sales over the past few quarters, in emerging. A Chinese supplier recently received FDA approval for vancomycin and is planning to supply the U.S. market with 15-20 tons of the product. While Alpharma does not expect volumes to be affected by the additional competition, we believe that the new competition will lead to additional pricing pressure in this segment. Alpharma expects to drive growth in the Animal Health business through line extensions, new product launches, new indications, and expansion into new markets. The company has been pretty active in expanding its presence in China during 2007. In April 2007, Alpharma acquired the assets of Shenzhou Tongde Pharmaceutical, a Chinese supplier of zinc bacitracin. Alpharma will continue supporting Tongde's existing customer base and will expand into new markets. In June 2007, Alpharma acquired certain assets from another Chinese company. This acquisition should provide supply chain flexibility and expand the company's regulatory base in Asia. Revenues from the Animal Health segment are expected to cross the $500 million mark by 2011. However, increasing commodity costs, especially corn and soy costs, could have a negative impact on the Animal Health business. 2006 revenues came in at $346.9 million, up 7% y-o-y. Revenues from the API and Animal Health segments are expected to grow 6-8% y-o-y on a combined basis in 2008. ALO will increase its R&D investment in both these segments in order to bring new products to the market. We expect a detailed update on these two segments at the investor day.
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