We Put This Pharma IPO to the Test
Cumberland Pharmaceutical is already profitable, but is it worth the offer price?
This report is made available compliments of Morningstar IPO Research Services. For more information on Morningstar IPO Research, please contact Marc DeMoss at firstname.lastname@example.org or +1 312 384-4052.
After a slow July, it appears that August could be hot for IPOs. While it would seem reasonable to assume August is typically a slow month on Wall Street, it's actually been pretty busy historically. Once again, health-care related firms appear to be taking the lead, something that we have been predicting for months.
Two health-care IPOs are coming to market next week. First up is Cumberland Pharmaceuticals, a specialty pharmaceutical company that focuses on hospital acute-care and gastroenterology. Cumberland will attempt to raise $100 million, offering 5 million shares with a price range of $19-$21 per share.
The company is somewhat of a rarity in the specialty pharma space, as it has drugs that have already been approved by the Food and Drug Administration and is already profitable ahead of its public offering. However, Morningstar equity analyst Brian Laegeler believes that the future potential of its drug portfolio is limited. He concludes the company is worth $15 per share, an increase over his initial take of $10 per share, but still well below the company's offer range. Brian expands on the impediments facing the company in his thesis:
"Cumberland Pharmaceuticals markets three drugs with limited potential. Near-term growth will depend on recently approved Caldolor, a relatively undifferentiated product in a small market with a vulnerable formulation patent. There is no late-stage pipeline, so long-term growth will depend on product acquisitions purchased with about $70 million of unallocated IPO proceeds.
"Currently marketed Kristalose is an off-patent laxative barely worth the promotion effort, with just $10 million in annual sales. Cumberland's Acetadote is more interesting; it has $35 million in annual sales and is the only U.S.-based intravenous formulation of N-acetylcysteine, the gold standard treatment for acetaminophen poisoning. Overdoses of acetaminophen, the active ingredient in Tylenol, are the leading cause of toxic drug ingestion in the United States and acute liver failure in U.S. adults. However, the upside for Acetadote is capped by competition from cheap oral substitutes, other potential injectable solutions in development, and the loss of orphan drug exclusivity after 2010. In 2009, a Food and Drug Administration advisory committee highlighted the dangers of acetaminophen, especially in combination with other drugs. Any crackdown on the distribution of acetaminophen should reduce poisonings and, therefore, sales of Acetadote.
"In June 2009, Cumberland received approval for Caldolor (formerly Amelior), another relatively undifferentiated drug. Caldolor is an injectable version of ibuprofen, a generic pain and fever reducer widely available in tablet form. The drug is a potentially safer alternative to generic ketorolac, the only injectable nonopioid pain reliever in the U.S. However, Cadence Pharmaceuticals (CADX) is closing in on approval for Acetavance, an injectable version of acetaminophen. According to Cadence, injectable acetaminophen is favored over injectable ibuprofen throughout Europe, which could result in slower acceptance of Caldolor in the U.S.
"Cumberland has minimal internal research capabilities and intends to use any IPO proceeds to acquire more drugs. In our view, there couldn't be a worse time for a small drug company to launch an acquisition program. Most big and specialty pharma companies we cover are desperate to rebuild sparse pipelines and have access to piles of cash. It's highly unlikely that Cumberland, with its limited resources, will attract a sizable or promising opportunity for a reasonable price.
"The one upside is that Cumberland is profitable. However, we think any profits to date are due to underinvestment in sales, research, and administrative expenses. We think current expenses need to significantly increase following the public offering, which means the business is not as scalable as it appears."
As for the increase to Brian's fair value estimate for Cumberland to $15 per share:
"We're increasing our fair value estimate now that Caldolor has received approval and Cumberland is seeking buyers for 5 million new shares at its target of $20 per share. If the IPO price is reduced to $15 per share, we'll lower our fair value estimate by around $1 per share. We assume that Caldolor captures 30% of an estimated $500 million market for injectable nonopioid painkillers at branded prices. Cumberland plans to at least double its hospital salesforce by 2011. We make no assumptions regarding future acquisitions."
Bill Buhr does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.