No Fire Fueling Flamel's Top Drug

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Overshadowed by issues with drugs more important to its own success, GlaxoSmithKline (NYSE: GSK) announced fourth-quarter sales numbers last week for the drug upon which Flamel Technologies' (Nasdaq: FLML) near-term future depends.

A controlled-release version of Glaxo's Coreg heart-disease treatment drug is the only approved compound on which Flamel receives royalties and manufacturing revenue. Glaxo introduced Coreg CR into the market last year, hoping to counteract the genericization of the original Coreg, but sales have been disappointing.

In its just-announced fourth-quarter results, Glaxo recorded $69 million worth of Coreg CR sales in the U.S., and a negative $2 million in sales in the rest of the world (likely due to product returns and refunds). In the third quarter, Coreg CR sales were $62 million, giving the drug puny 8% fourth-quarter sales growth.

Correcting for a typo in its financial results, full-year 2007 sales of Coreg CR were $176 million, with all of that occurring in the States. Coreg CR's failure to live up to the multibillion-dollar sales its immediate-release (IR) predecessor racked up may stem from negative clinical trial results, which failed to prove that CR was more effective than IR.

Without that data, both private and public health-care payers remain unwilling to pay more for patients to use CR versus the now extremely cheap and low-margin IR generic competitors. Unless this situation changes, if a patient wants the convenience of once-a-day Coreg CR, this could mean hundreds of dollars in extra annual costs -- an expense patients seem unwilling to pay for.

So what does all this mean for Flamel's financials? In the past, I've estimated that Flamel's current blended royalty rate on sales of Coreg CR was likely in the 3% to 5% range. Assuming 10% quarter-over-quarter growth, and using the more conservative 3% figure, Flamel will bring in roughly $2 million (depending on exchange rates) this quarter from royalties on Coreg CR.

If Glaxo can bump up the Coreg CR growth rate in 2008 to 10% quarter-over-quarter growth for the year, it should be able to generate roughly $340 million from the drug this year. At a 3% royalty rate, this will mean about $10 million worth of royalty revenue to Flamel this year. That's not enough to get me excited about Flamel, especially since it assumes a liberal growth rate for Coreg CR; however, it should provide enough fodder for Flamel to continue work on its pipeline drugs.

Flamel and other drug delivery pharmas like Alkermes (Nasdaq: ALKS) have had a tough 2007. Until Flamel can provide more color on its pipeline, I still recommend that investors take a wait-and-see approach to the drugmaker.

For more Foolishness:

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• Flamel Wheeling and Dealing
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