Alpharma Gives to Get

Giving financial guidance of expenses up and income down doesn't sound like a sign of good times ahead, but that was the forecast Alpharma (NYSE: ALO) gave for 2008.

Alpharma is an active pharmaceutical ingredient and animal health drugmaker, but it's trying to be more of a traditional pharma wrapped up in a smaller market capitalization. Things aren't all that bad for the company; sales guidance for 2008 is higher -- forecast to be up 13% to 15% year over year -- driven by an expected 35%-40% sales growth in its pharmaceuticals business.

But thanks to a little pre-Christmas spending spree in the last four months, expense growth is expected to dwarf these revenue gains. Several months ago, Alpharma acquired the rights to market a pain patch and pain gel in the U.S. The patch, a non-steroidal anti-inflammatory drug (NSAID) (like aspirin and ibuprofen) named Flector, is already approved for marketing, whereas the NSAID gel is still in phase 3 testing.

As a result of the Flector acquisition and its expected January 2008 sales launch, Alpharma is more than doubling the size of its sales force to over 400 reps and paying to enlist the help of a contract sales organization. Alpharma is essentially following the Endo Pharmaceuticals (Nasdaq: ENDP) and Cephalon (Nasdaq: CEPH) model of trying to make what would normally be a niche compound into a hit drug by marketing it like crazy.

Based primarily on the sales force expansion, earnings per share (excluding one-time costs) for 2008 are only expected in the $0.30-$0.50 range, compared with the $0.90-$1.00 per share that Alpharma expected for 2007.

Alpharma's pain franchise currently consists of its long-acting morphine drug, Kadian, which brought in $120 million in the first nine months of 2007. Kadian competes primarily with opioids like King Pharmaceuticals' (NYSE: KG) Avinza. Besides the in-licensing of the NSAIDs, Alpharma also plans on filing a marketing application for an abuse-deterrent version of Kadian in the first half of next year.

Nobody likes seeing a pharma they own shares in have to lower earnings guidance year over year, but as in most industries, a drug developer often has to spend up front to reap rewards later on. Alpharma's share price is likely to be volatile next year, considering that a chunk of its sales guidance is based on the unproven Flector. Now it's time to see if Alpharma can execute its strategy and grow its top line as rapidly as it wants.