Despite Silenor’s promising “clear path” to switch OTC in the next five to seven years, Somaxon Pharmaceuticals Inc. may place the sleep aid and its OTC and Rx marketing rights on the auction block.

After watching its stock fall from a high of $10.60 per share in March 2010 to a low of 42 cents per share, the San Diego firm announced Dec. 19 it is “evaluating various strategies to maximize stockholder value.”

Among the options under consideration are the possible “sale of the company or assets relating to Silenor, or partnering or other collaboration transactions relating to U.S. or ex-U.S. prescription or over-the-counter rights to Silenor,” Somaxon’s President and CEO Richard Pascoe said in the announcement.

If Somaxon decides to sell, Procter & Gamble Co. would have first crack at the sleep aid’s exclusive OTC marketing rights. The two firms entered into a co-promotional agreement Aug. 24, which was amended Nov. 23 to give P&G until March 31 to decide if it wants to license the OTC rights. Under the agreement, the firms are evaluating the potential to develop and commercialize an OTC product with doxepin, the active ingredient in Silenor, according to filings with the Securities and Exchange Commission.

During the evaluation period, Somaxon agreed not to negotiate for or solicit rights to an OTC doxepin product with any other third party, said Somaxon Chief Financial Officer Tran Nguyen.

Somaxon’s exploration of alternative strategies does not affect the arrangement with P&G, he said. If Somaxon were sold before P&G decides whether it wants the OTC rights, the new owner would have to honor the existing co-promotion agreement, he said in an interview.

If P&G is not interested and Somaxon goes forward with a sale, “we think Somaxon and Silenor could garner some serious interest,” given that Silenor is already FDA-approved.

–Jefferies analysts

If P&G opts in for the rights, it will have 120 days to negotiate a specific arrangement, he added. If it opts out, Somaxon then could solicit buyers for the OTC rights in addition to the Rx rights and full firm.

Somaxon’s review of its strategic options might not technically alter the P&G arrangement, but it “could complicate matters somewhat,” analysts with Jefferies & Co. say in a same-day note.

They add if P&G is not interested, and Somaxon goes forward with a sale, “we’re aware of several specialty pharma companies that have been on the lookout for [central nervous system] assets, and given that Silenor is already FDA-approved, we think Somaxon and Silenor could garner some serious interest.”

FDA approved Silenor as a prescription sleep aid in 2010. More recently during a joint meeting with P&G and Somaxon, the agency “provided clinical and regulatory guidance related to a Silenor over-the-counter program that we believe provides a clear path forward,” Pascoe said during the firm’s fiscal 2011 third-quarter earnings call Nov. 3 Also see "Somaxon Sees “Clear Path” For Silenor Sleep Aid Switch" - Pink Sheet, 10 October, 2011..

Exploring Alternatives

Hiring investment banking firm Stifel Nicolaus Weisel to help Somaxon explore strategic alternatives to maximize shareholder value “makes a lot of sense” given that Silenor’s “launch trajectory was admittedly less than inspiring,” the Jefferies analysts add.

Net product sales of Silenor climbed to $3.7 million in the third quarter of 2011 compared to $38,000 in the year-ago period, the firm announced Nov. 3. But the cost of sales also shot up to $500,000 in the quarter compared to just $3,000 in the third quarter of 2010. Total operating expenses also climbed to $18.5 million in the quarter compared to $12.9 million in the prior year’s same quarter, according to the firm.

The firm laid out an aggressive direct-to-consumer marketing campaign for Silenor during the third quarter call. But according to more recent SEC filings the firm has abandoned those plans for now to conserve money in part to fight paragraph four patent litigation.

Additionally, an executive Somaxon hired during its third quarter to head the DTC campaign has left the firm and the position remains open. According to a Dec. 13 SEC filing, Michael Allen’s employment as Somaxon’s senior VP for sales and marketing ended Dec. 15.

Unless the DTC marketing campaign is resurrected down the road, dropping the campaign could limit the success of a potential OTC switch. DTC marketing builds name brand awareness that firms can leverage during an OTC launch by playing up the Rx heritage.

Somaxon’s development of a marketing approach for a potential switch is in a very early stage, said Nguyen.

For example, an OTC version of the sleep aid could be launched under a different brand name. In that case, the firm marketing the OTC version still could highlight the drug’s “prescription strength” and track record as an Rx drug but would not rely on name-brand awareness of the Rx drug.

Nguyen emphasized Somaxon is “assessing all that,” and the timeline, dose and potential market value of an OTC doxepin product are similarly in flux.

Likewise, Somaxon might not sell Silenor or the marketing rights, Nguyen said. “We are evaluating all of our strategic alternatives and we are going to go with the alternative that maximizes shareholder value in the near term and long term.”

Analysts at Jefferies expect the strategic review process to begin in earnest in the first quarter of 2012, with the full process taking six to 12 months.

More Layoffs Loom

In addition to the potential sale, Somaxon announced a second round of layoffs, which could weaken the brand’s support.

Somaxon also announced Dec. 19 that it will cut 60% of its non-field-based staff. The layoffs follow a 75% reduction in sales force from 145 to just 30 reps that the firm announced during the third quarter call.

The measures are an attempt to minimize the cash burn rate, the firm says.

“At this point, the move makes sense and is prudent, as current spending levels behind Silenor simply are not justified at its current annual run rate,” Jefferies analysts write.

The staffing cuts could hinder Silenor sales, which already are flattening, the analysts say. Silenor sales will start trending downward over the next few months, they predict. For the sleep aid to return to a growth trajectory, they “believe it will take a much larger, dedicated sales force and continue improvements in managed care coverage.”

Despite analysts’ concerns, Nguyen is confident the firm is doing what is best and he believes Silenor is still an “efficacious and great product for the treatment of sleep maintenance and insomnia and we want to continue to be able to market this drug … and, of course, at the end of the day, get the products in the hands of patients who need it.”

Somaxon Could Seek Buyer For Silenor Sleep Aid, OTC Marketing Rights

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