Indevus Pharmaceuticals ( IDEV) has picked up a stronger marketing partner for its overactive bladder drug Sanctura XR. Allergan ( AGN), a specialty pharmaceuticals firm with annual revenue of around $3.5 billion, said Wednesday that it's
buying privately held Esprit Pharma for $370 million in cash. The centerpiece of the acquisition is the U.S. marketing rights to Sanctura XR, which Indevus had previously licensed to Esprit. Sanctura XR has the potential to be the best-in-class drug to treat overactive bladder -- a $2 billion drug market. The challenge is marketing. So-called OAB drugs require a lot of it, something that Indevus and Esprit couldn't handle on their own, especially when the big competition comes from drugs sold by Big Pharma giants like GlaxoSmithKline ( GSK) and Pfizer ( PFE). Allergan, however, is an experienced drug marketer, especially in eye care and dermatology. Selling genitourinary drugs like Sanctura XR is a new business for Allergan, but its sales expertise is likely what the drug needs to make a significant dent in the OAB market. This optimism for Sanctura XR -- and therefore for Indevus -- don't seem to be on display in the company's stock price, however. Indevus shares were off 19 cents, or 2.6%, to $7.09 in recent trading, even as Allergan shares were up 81 cents, or 1%, to $63.03. That's a bit hard to understand. If paying $370 million to gain control of U.S. rights to Sanctura XR is good for Allergan, logic suggests that the deal should also be good for Indevus, which will receive sales royalties from Allergan based on Sanctura XR revenue.
If I had to hazard a guess at explaining the stock reaction for Indevus, I'd say that while the new deal with Allergan looks good on its face, it's going to take some time before the real verdict on this deal can be decided. The new marketing agreement between Allergan and Indevus reduces the peak sales royalty for Sanctura XR to a flat rate of 12.5%. Previously, Indevus was due a stepped royalty from Esprit that topped out at a higher rate closer to 20%. While Indevus reduced its royalty rights, that's counterbalanced by a stronger marketing partner that should be able to produce higher Sanctura XR peak sales. Indevus also will receive royalties for a longer period of time. During a conference call earlier Wednesday, Allergan executives projected Sanctura XR peak sales in the range of $300 million to $400 million. Based on estimates of a $2 billion OAB drug market, that implies Sanctura XR peak market share of 15% to 20%. To some, that may be considered weak penetration, especially since the drug has dosing and side-effect advantages over its competitors. In the early stages of the drug's launch (in the first quarter 2008), Allergan says it will focus sales efforts on urologists and the highest-prescribing general practitioners. However, the biggest commercial success in the OAB market has come from getting general practice doctors to prescribe the drugs. Allergan doesn't have much experience marketing to general practitioners, which generally requires a very large sales force.
Leerink Swann analyst Gary Nachman says he's aware of all these concerns, but he believes Indevus is doing everything right fundamentally, so the stock should take care of itself. "I feel a lot better today about Sanctura XR than I did yesterday," says Nachman, expressing his confidence that Allergan will do a much better job marketing the drug than Esprit would have done on its own. "Allergan is a very conservative company. It's not going to throw numbers out there that it doesn't think it can meet or beat," he adds, referring to the company's peak sales forecast for Sanctura XR of $300 million to $400 million. "15
% or 20% market share for this drug is not high at all. Allergan just spent $370 million to get this asset, so I'm sure they want to make a big mark in the space," says Nachman, who has an outperform rating on Indevus. His company is a banking client of Leerink. Beyond Sanctura XR, the big focus at Indevus is on Nebido, a long-acting injectable testosterone that should be a best-in-class treatment for male hypogonadism, the failure to produce adequate amounts of testosterone. Nebido was filed with the FDA last month and could be on the market in 2008. The drug can be given once every three months, which makes it a much better alternative than current treatments, which are topical gels or two- and four-week injections. Male hypogonadism is a $500 million market opportunity with room for future growth.