Good Somaxon Exit Point

Somaxon re-files Silenor NDA

On June 4, 2009, Somaxon (SOMX - Analyst Report) announced that is has resubmitted the new drug application (NDA) to the U.S. FDA for Silenor (doxepin) for the treatment of insomnia. The submission comes roughly three and a half months after the FDA issued a Complete Response Letter (CRL) in late February 2009, and two months after management met with the FDA in early April 2009 to discuss the issues raised in the CRL.

The resubmission includes additional statistical analyses of the company’s clinical data relating to the durability of subjective sleep maintenance efficacy. It also includes the results of the company’s completed clinical trial of doxepin that evaluated the potential for electrocardiogram (ECG) effects. The results of that clinical trial demonstrated that Silenor had no effect on QT interval prolongation when administered at 6 mg or under exaggerated exposure conditions of 50 mg.

The NDA submission also includes data from Somaxon’s non-clinical development program, including the genotoxicity, reproductive toxicology and 26-week transgenic mouse carcinogenicity studies of Silenor, which were undertaken based on a previous request from the FDA.

The company continues to plan to submit the results of its standard two-year carcinogenicity study as a post-approval commitment. Somaxon initiated that study in August 2007 and expects data from the study in the first quarter of 2010. The FDA has indicated that the review cycle for the resubmission will be six months. Thus, a decision from the FDA is expected in early December 2009.

Significant challenges remain

Somaxon is running dangerously low on cash. Management exited the first quarter with $4.4 million in cash and restricted cash. Based on our financial model, Somaxon will run out of cash in July 2009. Therefore, the company plans to enter into a financing probably within the next week or two.

The stock is up from below $0.50 to now $1.60 based on the re-filing. We fully expect management to take advantage of the pop in the shares to raise capital. The company noted on its first quarter conference call that this financing will be enough to fund operations through the FDA review of Silenor. Therefore, we believe management will seek to raise roughly $8 – 10 million in new capital.

Given the current market value of only $30 million, we see the upcoming financing as potentially 30 to 40% dilutive. This is clearly better than our prior estimate back when the stock was $0.50 and the market capitalization was only $9 million. A licensing or signing a commercialization partnership on Silenor with a specialty pharmaceutical company could be a way to raise non-dilutive cash, but at this point we do not suspect that another company will be willing to invest in Silenor prior to FDA approval.

We do not recommend owning the stock ahead of this highly dilutive cash raise coming in the next week. We also believe that visibility on Silenor approval is low, despite the quick re-file in early June.

The insomnia market has shown little growth over the past few quarters.  The market is flooded with generic zolpidem (Ambien), which currently controls about 50% of the market. Sanofi (SNY - Analyst Report) and Sepracor (SEPR) are battling for prescription share with Ambien CR and Lunesta, respectively. However, we note that Lunesta’s market share is now below 10%, and with several additional agents on the market (Rozerem, Sonata) or nearing approval (Intermezzo), we struggle to see how Silenor will capture enough market share to attract a specialty pharmaceutical company willing to promote the drug and pay Somaxon a nice royalty (at least 20%) or agree to co-promote.

And, even at a 25% royalty, we do not see Somaxon posting positive net income based on Silenor until beyond 2013. Ambien CR is expected to lose market exclusivity in 2010. This will only further add to the difficult environment for launching a branded insomnia drug. Somaxon is clear to sell Silenor under Hatch-Waxman exclusivity until at least 2013 without the risk to generic alternatives.

At a 25% royalty, Silenor sales must eclipse $130 million before Somaxon will see positive net income. Somaxon has secured an intent-to-use patent for chronic insomnia that expires in 2013 and one in transient insomnia that expires in 2020. Given that we could potentially see a generic Silenor in 2013, Somaxon may never see positive income off of Silenor. As such, we would avoid investment and use today’s pop in share price as an opportunity to exit the name.