We are initiating coverage of Transcept Pharmaceuticals (TSPT) with an ‘Outperform’ rating and a $12 price target. Among the key points to our investment thesis are as follows:
Intermezzo approval in late October 2009 is a high probability event. We base this optimism on the fact that the company is utilizing the 505(b)(2) pathway for approval of a new low-dose formulation of zolpidem, a molecule that has been already approved by the FDA and is available generic.
Since the original approval of zolpidem as Ambien in 1994, the U.S. FDA has since reviewed the molecule multiple times, including three recent formulation approvals of a controlled release tablet with Ambien CR in September 2005, an oral spray with ZolpiMist in December 2008 and a sublingual tablet with Edluar in May 2009.
Intermezzo, a sublingual low-dose (3.5mg) formulation of zolpidem will be specifically intended for the use as-needed for the treatment of insomnia when a middle of the night awakening is followed by difficulty returning to sleep. This will be a unique label for the hypnotic sleep aid drug. Neither Lunesta nor Ambien are approved for a middle of the night dose.
Plus, the pharmacokinetic profile of Intermezzo is substantially improved from generic zolpidem, allowing more active drug to be absorbed into the blood stream initially, but with a lower overall systemic profile. These characteristics provide a drug with rapid onset of action and low residual side-effects.
Intermezzo has peak sales in the U.S. of approximately $500 million, based on our industry analysis and market share potential. Upside to this figure can come from heavier promotional efforts by Transcept’s U.S. partner, Purdue Pharma.
As such, our sales forecasts in our financial model are conservative until we see the terms and initial efforts of the commercialization plan. Nevertheless, based on the Intermezzo ramp, we believe that Transcept can achieve strong profitability by 2011, with strong EPS growth and near $1.50 in EPS by 2013.
Based on our financial model, and assuming approval of Intermezzo, Transcept should exit 2009 with over $110 million in cash on hand. Considering the current market capitalization of only $108 million, the name is extraordinarily under-valued. It would be unheard of for a company to be trading at cash with a $500 million approved drug.
One year after the commercial launch by Purdue we expect that Transcept will look to begin co-promotion of the drug by taking over the specialist market. This increases the return to Transcept shareholders by providing an even high royalty rate on sales in this segment, plus it opens the door to additional in-licensing and marketing opportunities in the psychiatry market.
By 2011, Transcept should effectively transform from a no-product, late-stage development company, to a fully-integrated, cash-rich, product and royalty based story pharmaceutical company.
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