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Cadence: When A Drug Approval Sinks Stock

SAN DIEGO ( TheStreet) -- U.S. regulators approved an intravenous pain drug from Cadence Pharmaceuticals (CADX) Tuesday and investors reacted immediately by selling the stock.

Cadence shares fell 9% to $8.20 in early Wednesday trading despite what looks like good news -- The U.S. Food and Drug Administration approved Ofirmev, an intravenous formulation of the pain reliever acetaminophen that Cadence plans to sell to U.S. hospitals. The stock traded as low as $7.51 earlier in the day.

When is a drug approval reason to sell a stock? Answer: When the drug's approval was widely expected and when the company planning to market the approved drug faces significant challenges convincing doctors or hospitals to buy it.

Cadence and Ofirmev fit both scenarios, hence the stock's significant weakness. Cadence is being penalized further because the company needs money to fund the Ofirmev commercial launch.

"For now, the stock faces investor skepticism about the launch – most recent drug launches have been disappointing – and a financing overhang. These issues may mute the usual post-approval stock rise and provide an inexpensive entry point, in our view," said Canaccord Genuity analyst Adam Cutler.

Cadence closed the second quarter with $68 million in cash but now needs to pay $15 million to Bristol-Myers Squibb (BMY - Get Report) as part of the licensing deal for Ofirmev. [Bristol sells Ofirmev under a different brand name in Europe.]

Cadence also needs to hire a sales force to sell Ofirmev, which will likely cost around $45 million.

Bristol's version of Ofirmev brings in about $250 million in European sales annually, which proves a market for the drug does exist. Ofirmev pricing in the U.S. is expected to be higher than it is in Europe and the drug faces less competition from other non-opioid, injectable pain relievers. Canaccord's Cutler estimates Ofirmev can generate U.S. peak sales of $500 million.

The challenge for Cadence is cracking U.S. hospital formularies, which can be a slow process. Many investors anticipate Cadence having similar difficulties as Cumberland Pharmaceuticals (CPIX - Get Report) has had gaining hospital acceptance for its intravenous NSAID pain reliever Caldolor.

For these reasons, investors are in wait-and-see mode until Cadence raises money and starts making progress on Ofirmev's launch.

--Written by Adam Feuerstein in Boston.

>To contact the writer of this article, click here: Adam Feuerstein.

>To follow the writer on Twitter, go to http://twitter.com/adamfeuerstein.

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Adam Feuerstein writes regularly for TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks, although he owns stock in TheStreet.com. He also doesn't invest in hedge funds or other private investment partnerships. Feuerstein appreciates your feedback; click here to send him an email.

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