Biotech Stock Mailbag: Cadence Pharma

BOSTON (TheStreet) -- An email and an argument over Cadence Pharmaceuticals (CADX) kick off this week's Biotech Stock Mailbag.

Ryan C. writes, "You were quick to jump on Cadence Pharmaceuticals after FDA approval. Almost seemed like you had your article ready to fire as soon as the approval was announced to push the price down. They announced today that they are now in over 200 hospitals and have reached 10% of their target market in 2 months. I wonder if you will be releasing an article saying you were wrong? How does that crow taste? The short squeeze you and your friends will experience over 2011 should be fun to watch."

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Ryan and I had a "strenuous" email debate last week about the accusatory tone of his email and the intent of a column I wrote last November immediately after Cadence received U.S. marketing approval for Ofirmev, an intravenous formulation of the pain reliever acetaminophen for use in hospitals.

Ryan believes I wrote the story to help my "short-selling buddies" bring down Cadence's stock price following the FDA approval. Not true, I said, trying to explain to him that I wrote the story in response to a slug of emails from readers who were confused about why Cadence's stock price was falling on good news. I was trying to explain Cadence's fall and what was needed to reverse it, not cause the stock to fall further.

"When is a drug approval reason to sell a stock?" I wrote in that November column. "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."

The column continued: "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… the challenge for Cadence is cracking U.S. hospital formularies, which can be a slow process… For these reasons, investors are in wait-and-see mode until Cadence raises money and starts making progress on Ofirmev's launch."

As expected, Cadence raised money and launched Ofirmev earlier this year. Last week, the company reported fourth-quarter results, notable for the encouraging, early signs from the Ofirmev launch. Cadence said 200 hospitals have added Ofirmev to their formularies in the three months since Ofirmev's launch -- progress that's coming faster than expected. Cadence would like Ofirmev inside 800-1,000 hospitals by the end of the year, representing about 50% of the market.

Getting on a hospital formulary is a necessary first step, but the end game is Ofirmev sales -- something not yet reported by Cadence. I'm in agreement with Ryan that last week's progress report was encouraging, but don't go full-bore bullish until Cadence follows through with revenue. Not all hospital formulary drugs are used by doctors.

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