Transdel’s Near-Term Opportunity

Ketotransdel the Driving Force

Last month, we initiated coverage of Transdel Pharmaceuticals (TDLP) with an Outperform rating and price target of $2.50 per share. We believe that TDLP-110, currently known as Ketotransdel, has the potential to be a meaningful share gainer in the treatment of acute soft tissue pain. We even expect use off-label for the treatment of osteoarthritis (OA) and musculoskeletal pain.

Ketotransdel (10% w/w ketoprofen transdermal cream) has significant advantages in the treatment of sight specific pain over traditional oral medications such as Cox-2 inhibitors (Celebrex), oral NSAIDs (ibuprofen, naproxen), and acetaminophen due to the lack of systemic exposure. As such, risks to the heart, the gastrointestinal track, the liver, and the kidneys are substantially reduced.

We see a major catalyst in the shares coming later this year, when management plans to present the data from the first phase III trial via an abstract entitled, “Efficacy And Safety Of Ketoprofen 10% Cream In The Treatment Of Pain Associated With Acute Soft Tissue Injuries (Phase 3 Study TDLP-110-001)” at the 13th World Congress on Pain, to be held August 29th to September 2, 2010 in Montreal, Canada.

We see peak sales in the U.S. for soft tissue pain at $200 million. Off-label use — and the potential that a partner eventually conducts a clinical program in OA to attempt to gain an OA-associated pain approval — can bring the peak sales on Ketotransdel to $300 million or above. We expect that management will look to secure a high-teens to low-20% royalty on sales at the commercial partner. Our financial model assumes cumulative sales from approval to the patent expiration in 2017 are roughly $690 million, meaning the cumulative royalty payment between approval and the launch in 2013 through 2017 to Transdel is in the area of $138 million.

Cosmeceutical Business Under-Appreciated

On June 17, 2010, Transdel Pharma and Jan Marini Skin Research (JMSR) entered into a licensing agreement providing JMSR with exclusive U.S. rights to Transdel’s transdermal delivery technology for use in an anti-cellulite cosmeceutical product (TDLP-310) for the dermatological market. This exclusive right lasts for one year, after which the right becomes non-exclusive.

JMSR also obtained a non-exclusive right to the product outside the U.S. In return, JMSR has agreed to pay Transdel a licensing royalty — we suspect mid-single digits — on the U.S. and worldwide sales of TDLP-310.

TDLP-310 is currently in subject trials. Given the limited nature of the exclusive right (expires in June 2011), we expect that JMSR will want to launch the product in the U.S. as soon as possible, most likely before the end of the calendar year. Our financial model assumes these royalty payments begin to accrue in the first quarter of 2011.

The deal with JMSR is on top of the already in-place relationship with JH Direct for TDLP-310, in which JH Direct will be distributing the product through direct response television campaigns, created and managed by JH Direct, followed by an expansion into traditional channels of distribution, such as retail or wholesale channels. We believe the royalty from JH Direct is similar to the JMSR royalty rate, at mid-single digits to Transdel.

Transdel’s cosmeceutical business remains under-appreciated in our view. The company should begin receiving royalty payments on TDLP-310 by the end of the year. Management’s goal is to, in time, use the cosmeceutical business to generate cash to cover the overhead as Transdel continues to develop prescription pharmaceutical products such as Ketotransdel. Beside TDLP-310 (anti-cellulite), the company is conducting formulation work on TDLP-320 (anti-aging) and TDLP-330 (pigmentation). Both products represent additional avenues for licensing to JH Direct, JMSR, or another leading skin care company in 2011.

Staying Positive

We value Transdel at approximately $2.50 per share. We arrive at this target by conducting a discounted (risk-adjusted) valuation analysis on Ketotransdel to a potential licensing partner.

We have used five previous deals for transdermal pain medications (Astellas and NeurogesX with Qutenza, Covidien and Nuvo Research for Pennsaid, Endo and Novartis for Voltaren Gel, Alpharma and IBSA for Flector Patch, and Alpharma and IDEA AG for Diractin) as a roadmap for what a potential deal for Ketotransdel may look like. Our conclusion is that Transdel has a near-term opportunity to partner Ketotransdel for upfront cash, potentially in the area of $10 to $15 million, along with backend milestones and royalties on sales.

TRANSDEL PHARMA (TDLP): Free Stock Analysis Report
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