Somaxon's Bore of a Quarter

Somaxon Pharmaceuticals (Nasdaq: SOMX  ) had promise -- it really did!

It wasn't that long ago that this no-name company with its razor-thin pipeline shot to the moon when the FDA surprisingly approved its sleep-therapy drug Silenor. Expectations were high, as it seemed very likely that Somaxon would either sell itself to a larger pharmaceutical company or sell the rights to its nugget of gold, Silenor. Surprisingly, the company did neither -- instead choosing to market the drug itself in partnership with Procter & Gamble (NYSE: PG  ) . 

Here we are nearly one year after the partnership with P&G, and the preliminary results look like a dismal failure. Procter doesn't have much to worry about, as it has the option to opt out of this partnership after two years while Somaxon bears almost all of the risk and cost to market Silenor. Need further proof of Somaxon's cost burden? Let’s take a glance at last night's quarterly results.

During the second quarter, revenue from the sale of Silenor reached $6.2 million, with prescriptions growing by 36% sequentially over last quarter. This may sound exciting, considering that the company had no revenue at this time last year, but this paltry figure still managed to fall short of expectations. Based on a recent accounting change that now includes sales to distributors, the company was able to recognize $2.7 million in deferred revenue. This means current-quarter revenue was only $3.5 million, which falls short of the $3.79 million consensus estimate. Somaxon also lost $0.33 while watching expenses balloon threefold to $20.5 million.

To add insult to injury for current shareholders, Somaxon accessed a $15 million loan payable by 2013 as well as notified investors of its intentions to sell up to $30 million worth of common stock through at-the-market offerings. It plans to use these issued shares to raise cash levels as it sees fit. Call it a hunch, but having seen the company's cash position drained from $54.8 million to $30.9 million in just six months, that time may come sooner than later.

The real problem Somaxon is running into that you just can't find in its quarterly report is stiff competition. With multimillion-dollar budgets from the likes of Sanofi (NYSE: SNY  ) with Ambien CR, Sepracor with Lunesta, Pfizer (NYSE: PFE  ) with Sonata, and Takeda Pharmaceutical with Rozerem, Somaxon is struggling to gain any meaningful market share.

Let's not also forget that Somaxon essentially sold itself down a river by licensing the rights to Silenor in Canada, South America, the Caribbean, and Africa to Paladin Labs for a paltry $5.5 million during the second quarter. It's not that the possibility for milestone payments doesn't exist, because Somaxon has outlined the potential for up to $128.5 million in payments with double-digit net sales royalties -- but something tells me these milestones are going to be incredibly difficult to achieve, especially at the company's current pace of growth.

I have to admit, even I was taken in by Somaxon's potential a few months ago, but my fervor for the company is quickly dissipating. I'm willing to give the company time to turn itself around from the sidelines, but I'm not as certain the market will be quite as forgiving.

Do you think Somaxon has what it takes to become profitable? Share your thoughts in the comments below, and consider tracking Somaxon Pharmaceuticals by adding it to your watchlist.

Fool contributor Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong  Motley Fool newsletter services have recommended buying shares of Procter & Gamble and Pfizer. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (7) | Recommend This Article (2)

Comments from our Foolish Readers

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  • Report this Comment On August 04, 2011, at 6:14 PM, CL2002 wrote:

    Sean,

    You wrote "the company was able to recognize $2.7 million in deferred revenue. This means current-quarter revenue was only $3.5 million, which falls short of the $3.79 million consensus estimate. Somaxon also lost $0.33".

    It hard to be fair!

    Where do you want to put that $2.7M reconized in deferred revenue. If you don't agree to put it in 2Q, whether you advocate to add it back to 1Q? Anyway, if they didn't beat 2Q consensus, then you should beat 1Q concensus awfully. Am I right?

    BTW, why you only mention "lost 0.33" and did give the consensus of loss 0.36 (as you mention consensus for revenue).

    Be fair!

  • Report this Comment On August 04, 2011, at 6:27 PM, CL2002 wrote:

    Corrected some errors

    Sean,

    You wrote "the company was able to recognize $2.7 million in deferred revenue. This means current-quarter revenue was only $3.5 million, which falls short of the $3.79 million consensus estimate. Somaxon also lost $0.33".

    It's hard to be fair!

    Where do you want to put that $2.7M recognized in deferred revenue. If you don't agree to put it in 2Q, whether you advocate to add it back to 1Q? Anyway, if they didn't beat 2Q consensus, then you should beat 1Q concensus awfully. Am I right?

    BTW, why you only mention "lost 0.33" and didn't give the consensus of loss 0.36 (as you mention consensus for revenue).

    Be fair!

  • Report this Comment On August 04, 2011, at 7:35 PM, CL2002 wrote:

    Sean, you also wrote:

    "With multimillion-dollar budgets from the likes of Sanofi (NYSE: SNY ) with Ambien CR, Sepracor with Lunesta, Pfizer (NYSE: PFE ) with Sonata, and Takeda Pharmaceutical with Rozerem, Somaxon is struggling to gain any meaningful market share."

    I would like to inform you that Silenor's market share is 4% currently (less than 1 year on the market). It is ahead of Takeda's Rozerem and at the same level as Pfizer's Sonata.

    BTW, Silenor is not a Schedule IV Controlled Substance. Except Rozerem, all others are. Silenor is safer than Ambien and Lunesta. Rozerem is approved for treating sleep onset, but Silenor is approved for treating sleep maintenance (giving insomniacs 7 to 8 hours restful sleep).

    Try Silenor, Sean, if you have insomnia.

  • Report this Comment On August 04, 2011, at 8:31 PM, zolpimist wrote:

    One should look at Novadel's version of FDA approved Zolpimist, generic spray version of Ambian being marketed by HiTech Pharmacal. Was launched lat Q1 of 2011, spray version offers faster onset, lower dosage, and ease of use.

    NVDL is also in clinical trials for a generic spray version of Pfizer's Viagra, named Duromist

    Its a penny stock but with two FDA approved products and Duromist on the way, maybe an oppty

  • Report this Comment On August 05, 2011, at 12:41 PM, delongskura wrote:

    "I would like to inform you that Silenor's market share is 4% currently (less than 1 year on the market). It is ahead of Takeda's Rozerem and at the same level as Pfizer's Sonata."

    Both of these products are non-players in the insomnia market and Rozerem in particular was a massive failure in terms of expecations and the amount spent on direct-to-conusmer advertising.

  • Report this Comment On August 06, 2011, at 8:26 PM, CL2002 wrote:

    "Both of these products are non-players in the insomnia market".

    Rozerem has been in the insomnia market for 6 years (apporved in 2005), and Sonata has been in the insomnia market much longer than Rozerem. In fact, Silenor has been in the insomnia market less than one year.

    Silenor's weekly Rx number is above 4,000 currently. It translates to more than $0.6M weekly sales for now. Silenor's 3Q sales will be above $7M. It means that Silenor (low-dose doxepin tablet) is at the third place of the insomnia market, behind zlopidem and eszopicline.

  • Report this Comment On August 16, 2011, at 5:30 PM, filmunas wrote:

    SOMX never had any promise! Its only product, Silenor, is a fancy name for doxepin, a tricylic antidepressant that has been available on the market for decades. Doxepin (original brand name Sinequan) is generic now and costs just pennies a pill. Physicians have used low doses of doxepin for sleep for a long time (though it is a poor choice for a sleeping pill because of anticholingeric and cardiotoxic side-effects).

    SOMX merely repackaged doxepin and called it Silenor, hoping to charge a fortune for it. It never worked!

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