New Intermezzo Patent And Orange Book Listing Are Major Positives For Transcept Pharma

Transcept Pharmaceuticals (NASDAQ:TSPT) announced after the close yesterday that its newly issued patent (U.S. Patent No. 8,242,131, or the ‘131 patent) was posted in the FDA’s “Orange Book”, the agency’s listing of ‘Approved Drug Products with Therapeutic Equivalence Evaluations’. The news means that the 3 generic companies that have challenged prior Orange Book listed patents for Intermezzo, the company’s primary value driver, will have to now successfully challenge the new patent to access the market with generic versions prior to patent expiration. The ‘131 patent was issued by the U.S. Patent and Trade office (PTO) on August 14th, and claims methods of treating middle-of-the-night insomnia with low doses of zolpidem (Intermezzo’s active ingredient). The ‘131 patent will expire no sooner than 2029, according to TSPT, and this “use patent” is a solid way for the company, and its marketing partner Purdue Pharma, to fend off generic competition for a long period of time. Transcept will receive a $10 million milestone payment from Purdue in connection with the Orange Book listing of the ‘131 patent, and TSPT is also eligible to receive up to an additional $70 million in milestone payments if Intermezzo sales in the U.S. hit certain sales targets. TSPT gets a royalty on U.S. Intermezzo sales from Purdue that ranges from the mid-teens to the mid-20% level.

The market for sleep aids is enormous, with 79 million prescriptions filled annually in the U.S. The company notes that each 1% share of the market equates to roughly $150 million in Intermezzo sales. Analysts expect peak sales for Intermezzo at approximately $500 million a year on average, which translates into just about 3% of the market. Given the ageing population and an increasing percentage of the population that has trouble staying asleep, these estimates could prove conservative. However, even at the expected sales levels, TSPT has the potential to more than double according to analysts, which have an average price target of $19.50 for the stock. For investors seeking value, TSPT has a whopping $4.74/share in cash (adding the company’s 2Q 2012 cash balance and the Purdue payment), which provides some downside protection while the launch of Intermezzo becomes established.  Expect TSPT to trade up today on the news of the new patent issuance and Orange Book listing.