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CRME: Initiating Coverage

By John Vandermosten, CFA


Note: This is an abbreviated summary of our full initiation report which is available on our website

We are initiating coverage of Cardiome Pharma Corp. (NASDAQ:CRME) with a USD$4.00 price target based on our estimates for current product growth and a 2020 launch of Trevyent in the EU and Canada.  The specialty pharmaceutical company is focused on developing current and future products in the EU, Canada, Middle East and other ex-US markets.  Cardiome’s current stable of products targets cardiovascular and infectious disease medicines for in-hospital acute care.  However, the company may pursue products in adjacent call points including pain, anti-spastics, antibiotics and others.  

Through its acquisition of Correvio in late 2013, Cardiome procured a salesforce, EU licenses and worldwide sales rights (ex-US) for Aggrastat.  This action provided immediate sales and infrastructure to commercialize the internally developed Brinavess as well as the structure necessary to layer on additional products.  Following this initial transaction, Cardiome has obtained the rights to four other products, including two complementary anti-infectives.

Based on our forecasts which include revenues for currently licensed drugs and a probability-weighted contribution from Trevyent, we expect breakeven on an operational basis in 2020.  This forecast assumes growth in all products, with a greater contribution from Xydalba and Zevtera in 2018 and initial contribution from Trevyent in 2020.

Cardiome is in a strong position to be a valuable partner for single-product companies that seek global distribution outside the United States.  With sales force, medical affairs and customer service assets in place, the company is an attractive and experienced partner with few direct competitors.  Recently launched products are going through the process of formulary addition and should begin to grow as they penetrate the highest volume hospitals.  There is also a pipeline of new products that fall into existing call points, predominantly in the pain area that could be added to the portfolio.  We initiate on the shares of Cardiome with a target price of $4.00. 


Cardiome has developed a platform of salespeople, licenses and other infrastructure that can support both current and additional products in the European acute care hospital space.  Since the 2013 acquisition of Correvio which brought Aggrastat into the portfolio and provided the infrastructure to sell Brinavess, Cardiome has been on the hunt to layer on additional products, demonstrating initial success with Xydalba, Zevtera/Mabelio and Esmocard so far with sales in 2017.  They have also signed an agreement for commercialization of Trevyent, which is expected to begin the approval process with the European Medicine Agency in 2019 and see first sales in 2020.  Management believes that they have capacity for four or five additional products, with only minor incremental cost.  They have identified several call points that expand out from their current focus on cardiovascular and anti-infective spaces which expands the field of potential additions.  

The company’s strategy is to seek pharmaceutical partners with a drug commercialization plan for the US market, but that require a distributor for areas outside of the US.  Attractive candidates are single-product companies that have just completed the FDA approval process but lack the knowledge, desire or capacity to commercialize a new drug in the EU, Canada and other smaller markets.  While Cardiome does not assume clinical risk, it does bear regulatory risk and will steer a drug with registrational data through the marketing authorization application (MAA) or new drug submission (NDS) process.  They will also take pricing and marketing risk given their knowledge of the negotiation process for these two critical parts of the equation.

Key reasons to own Cardiome’s shares:

➢ Developed sales infrastructure for global commercialization outside the United States
o Sales force in place in EU and Canada
o Expanding sales force in other key regions
o 11-distributor sales network in place
➢ Cardiology and infectious disease call points firmly established
➢ Competitive advantage in European medicines approval, price negotiation and sales
➢ Provides comprehensive ex-US commercialization capability with direct sales and distributor network
➢ Few competitors vying for acute care hospital drugs in EU and other non-US markets
➢ Able to add acquired asset for EU and Canadian distribution with only minimal incremental cost

Commercializing in Europe

After the United States, the EU is the second largest market in the world.  With 28 nations, an estimated population of 510 million, broad health care coverage and high living standards, the European Union is the second most important pharmaceutical market in the world.  Germany is the largest country in the alliance with 82 million people, followed by France, the UK and Italy, which together comprise over half the entire bloc’s population and the majority of pharmaceutical sales.  

Europe has four routes by which a drug can be approved:
1) Centralised Procedure (CP)
2) Decentralised Procedure (DP)
3) Mutual Recognition Procedure (MRP)
4) National Procedure (NP)

The CP allows for the authorization of a drug in all EU member states and is required for orphan medicines, medicines intended for HIV, cancer, diabetes, neurodegenerative/autoimmune diseases, and other immune dysfunctions, and drugs derived from genetic engineering processes.  Not all products will qualify for the CP, but most new innovative medicines will pass through this process.  The CP is controlled through the EMA and provides a single license that covers all member states.  The most common approach to obtain approval for a new drug is to use the DP where manufacturers apply for simultaneous approval in multiple EU states.  This approach is used for products that do not fall under the EU’s essential drugs list and for drugs that have not yet been authorized in any EU country.  The MRP allows for a drug approved in one country to be approved in all of them.  The NP is conducted on a country by country basis and is rarely used. 

A Marketing Authorisation Application (MAA) is a process to request approval for a drug to be approved using the CP.  The filing of an MAA is usually a year-long process with a break in the middle that provides an opportunity for questions and answers.  As shown in the following exhibit, for the first 120 days, the EMA reviews the application and prepares questions.  On day 120, the EMA submits its questions to the sponsor.  The time required to respond to the questions depends entirely on the sponsor, and when the answers are prepared and provided to the reviewers, the clock restarts.  Over the next 90 days, the reviewers develop their opinion and provide a response.  

The next step following the approval of the drug candidate is to begin negotiating with the individual countries’ pricing authorities.  These negotiations vary by country, but there is usually an assessment of price for value, and a quantification of the benefit on the quality of life for patients using the drugs.  In some cases, the national authority will not reimburse for the drug, but allow it to be available for private pay.  

In Germany, new pharmaceuticals are evaluated for their therapeutic benefit and then their prices are negotiated with sponsors.  If the negotiations fail, then the decision falls to an arbitration board.  Prices are generally based on a drug’s superiority over a comparator.  The process is governed by the Arzneimittelmarktneuordnungsgesetz  (AMNOG or Act to Reorganize Pharmaceuticals Market in the Statutory Health Insurance System) and was launched in 2011.  It allows a pharmaceutical company to immediately provide marketing, sale and reimbursement of a drug in its first year while the prices are being negotiated between the sponsor and the pricing organization.

United Kingdom
The UK uses a value-based pricing mechanism which seeks to find a balance between affordable prices and a reasonable return for pharmaceutical developers.  A government agency called National Institute for Health and Care Excellence (NICE) assesses new drugs using a metric known as “quality adjusted life-years” (QALY).  The value of a year of life in perfect health is set at £30,000 per year and drug costs above this threshold are usually not approved.  If NICE and the drug company cannot come up with an agreed price, then there are options for other arrangements called Patient Access Schemes.   Drug inflation is limited, and once the price is set there are two years of steady prices after which only low single digit increases are allowed.

Following a Marketing Authorisation (MA), a drug sponsor will submit an application for inclusion on the list of reimbursable medicines.  The French system appraises the drug’s reimbursement level based on its benefit in comparison with alternatives and identifies the population for which the candidate is eligible.  The Transparency Committee (TC) evaluates medicines and assesses the medical benefit of the candidate drug.  After completing its work, the TC passes the responsibility to the National Union of Health Insurance Funds to determine the reimbursement rate.  Drug prices are determined based on their therapeutic value which is compared to existing therapies and is assessed by the TC.  The process is expected to take less than 90 days following the start of pricing negotiations.  There are five gradations of added therapeutic value in the scale which ranges from major improvement to no improvement and this factor is re-assessed every five years to account for new products entering the market.  In some cases a drug will be made available for emergency interventions prior to reimbursement being determined.  Following the quantification of added therapeutic value, the Health Product Pricing Committee negotiates a contractual agreement that may include future pricing levels, minimum volumes and pricing renegotiations.  Stable pricing is required for five years following the agreement.  


In Italy, the Italian Medicine Agency (AIFA - Agenzia Italiana del Farmaco) manages pricing and reimbursement approvals.  An authorized product will be referred to a technical and scientific committee, which conducts an economic assessment of the candidate drug to determine if there is additional therapeutic benefit over existing drugs.  The drug sponsor must show how the new product adds value to patients and to the health care system as a whole.  Negotiations use prices in other markets, therapeutic value, pharmaco-vigilance data, innovation and projected patient usage and other data to determine pricing and reimbursement.  Italy also has regional authorities that can determine whether or not access to a certain drug is granted.  Risk sharing agreements are encouraged and reference pricing is used to determine the maximum price.  If no agreement regarding pricing and reimbursement is reached through negotiations, drugs are classified as non-reimbursable.

Following the pricing negotiation with the regulatory authorities, the sponsor will present the hospital medicines to formulary committees to make the case for formulary inclusion.  Cardiome management estimates that the top 100 hospitals in each of the major markets comprise the majority of sales making it relatively easy to identify the most impactful contributors.  Cardiome sales representatives will visit with each hospital and request meetings with the formulary committees which individually convene on different cycles.  The meetings can be quarterly, semi-annually or some other periodicity that is conducive to the hospital’s schedule.  Due to pricing pressures and local budgets, many times hospitals will delay the addition of new products until they have appeared elsewhere or they will approve them near the end of the year.  This can suspend first sales of a new product months behind its initial launch date as the sales force adjusts to meeting schedules.  

Bundled pricing is allowed in the EU which may allow volume growth for companies like Cardiome that have several product offerings.  

Commercializing in Canada

In Canada the Patented Medicine Prices Review Board (PMPRB) determines pricing for drugs in the country.  The PMPRB has a Human Drug Advisory Panel (HDAP) which determines if it is a new molecule or an extension of a previously approved drug.  If a new molecule, the panel evaluates its therapeutic value and uses comparator prices and costs in other countries to determine a maximum average potential price (MAPP) allowed for the drug.  If the drug is being offered at a rate lower than the MAPP, then no action is required.  If the price set by the sponsor is above the MAPP, then the PMPRB will negotiate and go through a process to align the two parties.  Drug price inflation is limited to the rise of the CPI.  

Approval in other countries, such as in the Middle East will be granted following approval by the FDA or EMA and a relatively basic application.  Pricing varies widely from very favorable in Middle Eastern countries, to competitive in other areas such as South America.  Cardiome in many cases works with distributors (which we discuss in further detail later in the report) who purchase drug directly from Cardiome at a transfer price and assumes all responsibility for approval, pricing and distribution in these regions.

Company Strategy

Cardiome is a revenue-producing specialty pharmaceutical company but does not yet have sufficient scale to generate a profit.  In 2017, three new products were added to the company’s portfolio, however, due to the dynamics in Europe with country by country price negotiations and long lead times for formulary inclusion, sales growth is an extended process.  We anticipate that with the current product set, breakeven will be several years in the future.  Under this scenario, Cardiome will require additional financing to either support operations until breakeven or it will make an acquisition of additional assets which will leverage the current infrastructure to provide profitable operations.  Our sense is that management would like to do a deal for an established product that will provide sufficient revenue to cross the threshold to breakeven prior to undertaking additional growth products.

When Cardiome acquired Correvio in 2013, they were able to buy the company using a combination of 20% of shares outstanding combined with $12 million in deferred cash payments, worth $21.9 million .  The company may follow this strategy again in a subsequent acquisition, which will avoid the need for additional debt.  This approach is more likely for a product that is already established and non-strategic for the selling company.  The other side of the acquisition program is to bring on new products.  For new products, Cardiome can offer the originating company its experience in navigating new chemical entities through the EMA regulatory process and negotiating pricing with each of the member states.  As we describe above, this is a detailed and specific process for each country and Cardiome’s experience can speed a product to market and efficiently commercialize it compared to a go-it-alone approach in the region.

Cardiome is in a strong position to grow its product offerings now that the infrastructure for European and Canadian commercialization is in place and there are sales from multiple products.  The company’s business strategy has been refined in recent years as elucidated below.

➢ Pursue business development opportunities in both Europe and Canada 
➢ Secure assets that can provide:
o Immediate revenues
o An acceleration in achieving corporate profitability
o Improved strategic position with existing call points
➢ Obtain medicines in a pain, antibiotic or other acute care category seeking an EU commercial channel
➢ Pursue in-hospital products to address areas of high unmet medical need in advanced state of development
o Late Phase 3 trials
o Launch ready

With the 2013 acquisition of Correvio and the associated licenses and sales assets, Cardiome created a valuable structure that allows for the layering of additional products for distribution in Europe.  Areas that are complementary to the current portfolio include cardiovascular, infectious disease, pain, anti-spasticity agents, and adjacent classes related to these hospital call points.  

Many drug development companies throughout the market capitalization range lack European and Canadian infrastructure required to efficiently access hospital markets.  In the absence of sufficient sales to justify a $40 or $50 million sales force, many companies seek a partner to commercialize high-quality products in key areas outside of the US.  Cardiome is able to fill this need and provide the commercialization activities to obtain approval, pricing and sales with the key customers in the region.  With available sales capacity and infrastructure in-place, the incremental cost of hospital sales in these targeted markets is very low, making Cardiome a very attractive partner.

Significant Event Timeline

Cardiome has a number of recent and upcoming milestones related to new geographic launches and interacting with regulatory authorities regarding the approval process.  Over the next year we anticipate the following events to take place on or around the indicated date.  

➢ 4Q:17 – Esmocard Lyo launch in Belgium, France & Italy 
➢ 4Q:17 – Filing for approval of Xydalba in Canada
➢ 4Q:17 / 1Q:18 – Commercial rollout of Brinavess in Canada
➢ FY:18 – Business development efforts in targeted areas 
➢ FY:18 – Capital raise using ATM
➢ 2Q:18 – Launch of Zevtera/Mabelio in Spain & Ireland 
➢ 4Q:18 – Launch Xydalba in Belgium & Netherlands
➢ 1H:19 – Capital raise using available funds from the debt facility
➢ FY:19 – Filing for approval of Trevyent in EU 
➢ FY:20 – Launch of Trevyent in EU and other regions


Cardiome has invested in infrastructure that makes them an attractive partner for hospital drugs that require distribution in Europe, Canada and the rest of the world.  The company has developed and refined its sales force over the last several years to emphasize cardiology and anti-infective call points and has the ability to expand into pain and other areas of the hospital as well.  Cardiome is seeking acquisitions to leverage its current infrastructure and build a bridge for products in the US to be developed in Europe, Canada and the rest of the world.  We believe the company’s primary goal in the short term is to acquire an established product that can provide sufficient revenues to achieve breakeven or better.  After the company has become self-sufficient, we anticipate efforts to acquire late-stage development and patent protected growth products will be next.  Cardiome has the experience and skill to navigate new products through the regulatory, pricing and hospital formulary inclusion process.  We see the company’s platform as highly leverageable and with few competitors in the company’s specialized hospital-based call point.

Key reasons to own:

➢ Developed sales infrastructure for global commercialization outside the United States
o Sales force in place in EU and Canada
o Expanding sales force in other key regions
o 11-distributor sales network in place
➢ Cardiology and infectious disease call points firmly established
➢ Competitive advantage in European sales
➢ Provides comprehensive ex-US commercialization capability with direct sales and distributor network
➢ Few competitors vying for acute care hospital drugs in EU and other non-US markets
➢ Able to add acquired asset for EU and Canadian distribution with only minimal incremental cost

In summary, we believe Cardiome represents an attractive platform for growth in the European, Canadian and global ex-US market.  Based on our DCF model, the shares are undervalued relative to their potential.  While we did not include any value for future acquisitions, a tenet of our thesis is that these will occur and will be highly accretive given the company’s in-place infrastructre.  Based on our analysis and forecasts, we initiate Cardiome Pharma Corp with a target price of $4.00.


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