Intermezzo Sales Still Slow, but Expansion Efforts Are Underway

Intermezzo prescriptions are slowly growing, says Transcept management, but royalty revenue has yet to make a substantial contribution to Transcept Pharmaceuticals’ (NASDAQ:TSPT) top-line. For the third quarter, the company reported revenue of $10.4M, $10M of which came from a milestone payment from Intermezzo’s marketer, Purdue Pharmaceutical Products, and only $0.2M from product royalties. Purdue launched Intermezzo, a sleep aid approved for middle of the night awakenings (MOTA), in April of this year, for which Transcept receives tiered double-digit royalty payments. The company reported diluted EPS of $0.25 on $4.9 million in net income and ended the third quarter with cash, equivalents, and marketable securities of $98.7M ($5.30 per share). On Tuesday, TSPT shares traded at $4.34, a a 19% discount to Transcept’s underlying cash value, implying that the market places little faith in Intermezzo’s immediate success.

In Monday’s earnings call, management said, “While we are seeing continuing month-to-month growth in total Intermezzo prescriptions, the absolute numbers indicate that significant work remains to establish Intermezzo as the important insomnia product we believe it will be...[challenges] include further expanding managed care access for Intermezzo, motivating physicians to identify middle of the night awakening as an important manifestation of insomnia, and building awareness among physicians and patients of Intermezzo as the right treatment option." Management went on to discuss Purdue’s progress with insurers and managed care providers, and cited a co-pay reduction card that should help patients on managed care. Purdue and Transcept have also discussed Direct-to-Consumer sales, but the company gave few details on the conference call.

The market for sleep aids is considerable (79M prescriptions annually in the U.S.), but the question remains whether or not Transcept and Purdue can capture a significant portion. Management admitted that, “Until the introduction of Intermezzo, physicians did not have compelling clinical reasons to differentiate between insomnia patients having problems going to sleep at bed time and patients whose insomnia was characterized by middle of the night awakenings.” The task, then, is to create the market for MOTA treatments through physician education, and it appears Purdue is committed to the effort; they’ve pledged $100M for sales and marketing in the first 12 months of commercialization. (Read more in our original report.) Despite the slow product launch, we see long-term value in TSPT based on a strong balance sheet, a noteworthy partnership, and pipeline expansion. Transcept is actively trying to expand its product portfolio through an acquisition or licensing, and also develops TO-2061 as a treatment for OCD. The ongoing Phase 2 study of TO-2061 should report top-line data in the first quarter of 2013.