Flamel's Frail, Fluctuating Future

For years now, investors in Hidden Gems pick Flamel Technologies (Nasdaq: FLML  ) have endured a roller-coaster ride. Whenever the company's prospects have appeared brightest, something has come along to knock them down. And whenever its future has appeared bleakest, it has similarly managed to rise from the dead.

Right now, Flamel needs to reduce its money-burning ways, including a $22.7 million loss in the first half of the year alone. Its only hope lies in the royalties and manufacturing revenue that it receives from GlaxoSmithKline's (NYSE: GSK  ) heart-disease drug Coreg CR (controlled release), which it helped design.

Coreg CR is important to Glaxo, because it may help recoup some of the lost sales from the immediate-release (IR) version of the drug, which began facing generic competition last month. The original version of Coreg accounted for $1.4 billion of Glaxo's sales last year.

Despite the onslaught of generic competitors for Coreg IR, Glaxo has continued to slowly grow its number of prescriptions for Coreg CR. It's added slightly more than 2% a week for the past eight weeks, according to IMS Health data.

If Glaxo can keep up a Coreg CR prescription growth rate of 1% a week for the next 52 weeks (including very slow periods around the holidays, and the introduction of further generic competitors), it would end up with nearly 3.1 million prescriptions. But what sort of cash would that bring Flamel?

The royalty guessing game
Flamel's royalty rate on Coreg CR sales, and its manufacturing revenue for its part of the Coreg CR production, remains undisclosed. Flamel's largest shareholder, Oscar Schafer of O.S.S. Capital Management, believes that royalties to Flamel will occupy the 5% to 10% range. But I'd use a smaller number, like 3% to 5%, to account for Glaxo's bargaining power with Flamel at the time of the deal, and the royalty rate on similar deals.

For example, Alkermes' (Nasdaq: ALKS  ) reformulation deal on Johnson and Johnson's (NYSE: JNJ  ) Risperidone provides it with a 2.5% royalty on sales of the drug. SkyePharma receives a 4% royalty on sales of Glaxo's extended-release Paxil CR (originally a 3% royalty), which it helped develop.

You can always find exceptions to these rules, like DURECT's (Nasdaq: DRRX  ) royalties between 6% and 11.5% on net sales of King Pharmaceuticals' (NYSE: KG  ) formulation of abuse-resistant OxyContin product. Still, I believe the Alkermes and SkyePharma deals are better benchmarks for Flamel's deal with Glaxo.

Putting the numbers together
Using a conservative 3% royalty rate as Flamel's cut on Coreg CR sales, and an average monthly wholesale prescription cost for Coreg CR of $125, means that Flamel will bring in $11.5 million from the drug in the next 52 weeks, provided that Glaxo can maintain a 1% sales growth rate.

This does not include manufacturing revenue, which is a black box. $11.5 million is certainly not chicken scratch, but it's hardly enough to make Flamel the next hot Rule Breakers growth stock.

One word of caution: These numbers are rough estimates at best, and they're very sensitive to changes in inputs like the prescription growth rate, royalty rate, or the average wholesale prescription cost. The latter varies substantially, depending on whether a patient is getting a 30-day or 90-day supply of Coreg CR and/or a free sample.

Doubling down on COSMOS
This exercise does make it clear that Flamel and Glaxo need to show Coreg CR's superiority to Coreg IR and its generic equivalents, if they want to make the drug into anything close to a blockbuster in the long run. That's assuming, of course, that the patents hold up to any challenges after 2010.

Weekly prescription growth of 1%, 2% or even 3% at this early stage of a product launch will not make Coreg CR a top drug. As one article (PDF) concluded, "Since there are no (successfully) completed clinical outcome or compliance trials for (Coreg CR), and tolerability is similar between dosage forms, current data do not support using the (extended release) formulation over the (immediate release) formulation." Another insurer similarly decided not to cover Coreg CR because it "is not more effective and does not have fewer side effects than regular release Coreg."

Until GSK is able to prove otherwise to insurers and governmental health-care authorities (in Europe, for example), Coreg CR will likely remain nothing more than a niche drug. That's why Flamel needs GlaxoSmithKline to produce robust study results from the ongoing COSMOS hypertension study of Coreg CR.

Glaxo has been tight-lipped on when the data from the COSMOS trial will come out, but right now, Flamel's near-term future is riding on it.


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