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.

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