Bill Buhr: Hi, I'm Bill Buhr, IPO strategist with Morningstar. While July was a pretty slow month in the IPO space, August looks like it's picking up, as two companies will come to market in the next week. One of those, Cumberland Pharmaceuticals, is looking to raise $100 million.
Joining me today is specialty pharma analyst Brian Laegeler to talk about Cumberland. Brian, thanks for coming.
Brian Laegeler: Thanks for having me.
Buhr: Now, where does Cumberland fit into specialty pharma?
Laegeler: Well, Cumberland is a specialty marketer, like King Pharma or Forest Labs. These types of companies have limited discovery efforts, and what they do is acquire most of their products. So the power of this business model is in concentrating several products down one audience so they can maximize their sales revenue per salesperson.
For Cumberland, their specialty is hospitals. They've got 30 right now, specializing in the hospital-sales-force side. They're going to expand to 77, post-IPO.
Buhr: Brian, what are some of Cumberland's key products?
Laegeler: Key products for Cumberland are Acetadote and Caldolor. Acetadote is about $35 million in sales. It's the gold standard for acetaminophen poisoning. Acetaminophen is the active ingredient in Tylenol. What most people aren't aware of is that it's also one of the leading causes of drug poisoning in the U.S.
The other drug that is recently approved, then, is Caldolor. Caldolor is the first approved injectable ibuprofen. And right now, it's the only approved injectable in the U.S. for both pain and fever. We think it can reach about $150 million in sales, more or less.
Buhr: What are some other things you like about Cumberland?
Laegeler: Well, what I like about Cumberland is that, first of all, it's profitable. There are a few specialty pharma firms that, when they first go public, are profitable and have been for a while, albeit off a small base. They also have a major catalyst with the Caldolor launch, now that it's already approved.
A year ago was a much different story, when they tried to do the IPO before it was approved. Now it is approved, so we're going to have virtually guaranteed strong, double-digit earnings increases.
Also, the third thing I like about it is insider ownership. After the IPO, directors and officers are still going to own about 44% of the company.
Buhr: What are some of the caveats surrounding this story?
Laegeler: Well, for Acetadote, for example, this drug has already started to slow on its growth trajectory. And it's also not going to help that the FDA's advisory panel has been coming out and, basically, talking down the acetaminophen market, saying, "We might need to pull some of these combination products because acetaminophen is too widely distributed."
So, if you have less acetaminophen on the market, then you're probably going to have less poisonings. You would think that'd be the case. If that's the case, they're going to need less antidote.
Now, for Caldolor, it's a little longer store. I'd say the caveats there are, the market for injectable ibuprofen, a non-opioid pain and fever reducer, is really tiny, if you think about it, given the vast amount of cheap, generic alternatives available that do the exact same thing.
So, if you go into a hospital and you need your fever reduced, you've got generic ibuprofen pills, liquids, suppositories if need be, and if you're in bad enough shape, they might even give you a cooling blanket. So it's unclear where you're going to pay 10 times generic pricing just to have the convenience of an injectable.
In addition to that, a company called Cadence Pharmaceuticals is coming out with an injectable acetaminophen, which is also a fever reducer, and this is going to come out within about a year after the IPO launch, potentially. According to Cadence, it's actually more popular in Europe than injectable ibuprofen.
And I'd say the third thing is that it's just limited patent protection. When you improve a formula, you come up with a new novel drug, you only get three years' market exclusivity, and then you have the ability for generic firms to come in and challenge your patent.
Buhr: Now, the firm has priced its offering with an offer range of $19 to $21 per share. You're a little bit lower than that. You pegged the firm's value at around $15 per share. So this is somewhat of a bearish call. What are some of the key factors of your evaluation?
Laegeler: Well, I think what investors in Cumberland need to keep in mind is just really think about the market for Caldolor, how big it might be at branded pricing, and the risks and certainties surrounding that, and then also how wisely they're going to invest the cash post-IPO.
So they're raising $100 million of that. They'll take home maybe $90, after fees and expenses. They're going to spend another $20 on SG&A and increasing their research budget, which they are underspending on right now, pre-IPO. So that leaves only about $70 million.
And they've got to intelligently spend that money in order to acquire the next product. This is a company without, really, any late-stage pipeline. They have three approved products but, really, no late-stage pipeline.
Buhr: Brian, thanks for joining me.
Laegeler: Thanks for having me.
Buhr: I'm Bill Buhr with Morningstar. Thanks for watching.