Do Oxtellar and Trokendi Make Supernas a Buy?

Shas is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Supernas Pharmaceuticals (NASDAQ: SUPN), a specialty pharmaceutical company in the business of developing and marketing drugs for treatment of central nervous system (CNS), announced on Thursday that it would be selling 6 million shares of its common stock at $8 per share, a 19% discount to its closing price of that day. As expected, SUPN shares fell on Friday to close at $8.17.

Presently, the company is not selling any product in the market and plans to launch its epilepsy drugs Oxtellar XR and Trokendi XR sometime next year. The question that investors would want to ask is if the recent fall and the launch of its first products indicate a buy signal at this price?

The Offer

The present sale offer has an over allotment option of another 900,000 shares, which if exercised in full by the underwriters will provide the company with $51.5 million in capital. The funds raised from the offering will be used for the commercial launch of two epilepsy drugs, Oxtellar XR and Trokendi XR and also for developing SPN-810 for the treatment of impulsive aggression in ADHD patients and reducing part of its debt obligations.

Oxtellar XR and Trokendi XR

Both Oxtellar XR and Trokendi XR are extended release versions of existing epilepsy drugs. The active ingredient of Oxtellar is oxcarbazepine, which is an approved drug and being sold by Novartis (NYSE: NVS) as Trileptal and under different names by a few other pharmaceutical companies. Trokendi' active ingredient is topiramate, and is sold under different brand names including Topamax of Johnson & Johnson (NYSE: JNJ).

The Competition

Both Novartis and Johnson & Johnson are multinational pharmaceutical companies operating in different segments covering a wide range of products. NVS, the third largest pharmaceutical company in the world, is more of a dividend play (dividend yield 4.1%) and trading at its 52-week high suggesting little scope for capital appreciation in the near future. Moreover, in the last quarter, the company experienced a 6% drop in EPS. JNJ is a similar story – solid dividends (yield- 3.49%) with little scope of appreciation in share price. In addition, like most other major drug companies both Novartis and Johnson & Johnson have to bear the brunt of patent expirations.

Sale Potential

Efficacy of the active ingredients in both Oxtellar and Trokendi is not in doubt, as they are already in the market and being used for treatment of epilepsy. However, Supernus’ offerings are at an advantage over competition as they are extended release versions and once-a-day drugs.

Extended release technology, also known as sustained release, is a mechanism used for dissolving a drug over time so that it is released slowly but steadily into the blood stream. The active ingredient is embedded in a matrix of insoluble substance(s) and the dissolving drug finds its way through the holes in the matrix. Another way is to enclose the drug in polymer-based tablets that have laser-drilled holes on one side, and on the other side a porous membrane that allows stomach acids to enter and push out the active ingredient.

This provides the advantage of taking a drug less frequently compared to immediate release formulations, which in this case are already being sold by the competition.

It is worth mentioning here that epilepsy can be controlled with medication, but not cured. In most of cases, patients need lifelong treatment. Immediate release formulations need to be taken multiple times, and prolonged use is one of the major factors that lead to side effects. Extended release pills and capsules are normally taken once-a-day, which significantly reduces or eliminates that risk.

Analyst Jonathan Eckard of Citi Investment Research, who has been covering Supernus, estimates that both drugs have significant commercial potential, and annual Trokendi sales could reach $325 million.

Product Pipeline

Supernas announced positive results of the Phase IIb on SPN-810 for impulsive aggression in ADHD, its other two products – SPN-812 (for ADHD) and SPN-809 (for depression) are in different stages of development. SPN-810 was well tolerated across all doses and Jack Khattar, Supernus president and CEO, said that

"We are very excited about the positive results exhibited by SPN-810 at lower doses. The study accomplished its objectives of establishing a dose range at which the drug is effective and confirmed the efficacy of SPN-810 (molindone hydrochloride extended release formulation) in the treatment of impulsive aggression in ADHD patients"

On the flip side is reduction in shareholder value due to the current sale and a negative EPS. Supernus went public in May this year with an IPO at $5 per share. A negative EPS is normal for a company that is waiting to launch its first product/s. However, this should be viewed in the context of analysts’ forecast of earnings growth as reflected by the chart below:

<img src="/media/images/user_14377/1_8_large.png" />

Source: Nasdaq website

A big plus for Supernus is that it focuses on discovering new uses of known drug compounds by using proprietary and in-house licensed technologies. This reduces cost and time and eliminates the risks associated with development of pharmaceutical products.

Should You Buy SUPN At This Price?

The share price of SUPN has suffered due to the sale offer but the point to be noted is that since its IPO SUPN stock has touched a low of $4.30 (June 5, 2012) and a high of $16.68 (July 19, 2012). Approval of Oxtellar XR was announced on Oct. 19, 2012 when the stock price was hovering around $13, indicating that the FDA approval was already discounted by the market. November saw a slow decline in the price of SUPN, indicating that some bad news was on its way, and then came the sale offer at $8.

Considering the sale potential of Oxtellar and Trokendi, SUPN’s product pipeline and future earnings growth and despite the apparent lowering in shareholder value, I consider Supernus to be a solid investment. At a 50% discount to its all-time high, SUPN may be down but it is not out.


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