An Appealing Play in Pain Management

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Corporate Strategy

We believe Alpharma has made a major commitment to the pain-management market, with the recent launch of the novel Flector patch, and the in-licensing of a ketoprofen gel for osteoarthritis. As topical formulations, these products, in our view, offer better safety profiles than systemic oral pain drugs. We project the overall transdermal NSAID market to expand to more than $2 billion five years from now.

As Flector was the first entrant in this market, we believe it has gained an important lead over other potential competitors. We think the next competitor in the U.S. market will be Voltaren Gel, a NSAID gel that Endo Pharmaceuticals (ENDP) recently in-licensed from Novartis (NVS). However, we believe Flector will be the therapy of choice for most users given its dosing and efficacy competitive advantages. We think recent anecdotal evidence from physicians prescribing Flector has been highly encouraging, with weekly prescriptions rising to 6,694 in the fifth week after its launch in mid-January 2008. We see continued robust uptake for Flector over the coming months, helped by an expanded sales force and greater acceptance among managed-care providers.

Besides growth in the overall market, and some shifting away from oral treatments, we also think Flector has the ability to take market share from Endo Pharmaceuticals' Lidoderm pain patch (sales of $706 million in 2007), which is used to treat pain associated with shingles. We project Flector sales of over $60 million in 2008.

Another key expansion in the pain portfolio took place in October, 2007, with Alpharma's in-licensing from IDEA, a German biopharmaceuticals firm, of U.S. rights to market ketoprofen in Transfersome gel for $60 million in cash at closing, plus up to $142 million in contingent milestone payments. Similar to Flector in that it is a topical NSAID, this gel differs in its active ingredient (ketoprofen instead of diclofenac) as well as in its ability to treat pain on body joints such as knees and wrists. Presently in phase III trials for the treatment of osteoporosis, we expect this product to reach the market in 2011.

Aiming to grow its extended-release morphine sulfate drug franchise after Kadian loses patent protection in 2010, Alpharma has developed and recently filed a New Drug Application (NDA) for a new abuse-deterrent extended-release morphine sulfate to be sold under the Embeda brand name. We think the abuse-deterrent feature will represent a key competitive advantage, given the growing incidence of prescription drug abuse, especially for opioid drugs.

We think Embeda has a good chance of being the first abuse-deterrent opioid drug to reach the market. The second one will probably be Remoxy, in our view, an abuse-deterrent oxycodone-based drug that King Pharmaceuticals (KG) in-licensed from Pain Therapeutics (PTIE). Alpharma is also working on its own abuse-deterrent versions of oxycodone and similar drugs.

Near-Term Prospects

Primarily reflecting the planned absence of the API business (which Alpharma has classified as a discontinued operation), we expect total reported revenues to decline 10% in 2008, to about $650 million. However, we see significant growth in pharmaceutical sales, primarily reflecting contributions from Flector, as well as strong momentum in Kadian. We also think there's a good chance Embeda will be approved and launched in the fourth quarter. In addition, we project mid-single-digit growth in sales of animal health products, helped by expansion in new Asian markets.

However, we expect 2008 earnings to be affected by the absence of the API division, which we believe accounted for more than 50¢ of 2007 earnings per share (EPS). We also see results impacted by heavy selling, general, and administrative and research-and-development spending related to new pain drugs. We forecast operating EPS of 40¢ for 2008, vs. 2007's $1.06. Results in 2007 exclude the $60 million up-front payment for ketoprofen gel. Reflecting solid growth in the expanding pain franchise and cost streamlining measures, we see EPS ramping up to $1.30 in 2009.