Why Pfizer Should Put Thoughts of a Somaxon Acquisition to Sleep

Last Updated Apr 12, 2010 4:48 PM EDT

The FDA's approval of Somaxon (SOMX)'s new sleeping pill, Silenor, has come at just the wrong time -- just as cheap, generic versions of Ambien CR come on to the market -- yet some still believe the drug could rack up nearly $1 billion in sales, making the company an attractive acquisition target, possibly by Pfizer (PFE).

In a note to investors last week, Jefferies & Co. analyst Corey Davis wrote that he believed Silenor could reach $956 million in sales in 2018. "Management in its current state is incapable of launching Silenor without significantly more infrastructure and costs," and thus the company could possibly get bought by a larger partner, he wrote.

Davis mentions Pfizer because the company desperately needs successful brands to replace the loss of Lipitor next year and because it was once involved in a failed attempt to bring indiplon to market as a sleeping pill with Neurocrine Biosciences.

While Somaxon may be worth acquiring -- Davis listed Eli Lilly (LLY), Sanofi-Aventis (SNY), Boehringer Ingelheim, Eisai, Takeda, King Pharmaceuticals (KG) and Purdue Pharma as other possible takers -- it's not at all clear that there's a $1 billion market out there for a new insomnia medicine.

The main problem is that the FDA delayed Silenor's launch for so long that both Sanofi's Ambien and Ambien CR went generic while the company was waiting for a green light. With all that cheap competition on the market, the opportunity for Silenor has dwindled.

Davis points out that the FDA did not require that Silenor be designated a controlled substance covered by the DEA -- meaning that it's supposedly safer than Ambien. That sounds great except ... a lot of insomniacs actually want a powerful pill to knock them out. Ambien is still hugely popular with those who use it, despite all that stuff about sleep-eating. Takeda tried marketing a "safe" pill that works with the body's natural sleep mechanism, just like Silenor's, and that product (Rozerem) failed.

Even if Silenor is affective, history tells us to be cautious. As Davis points out, when Lunesta was launched in 2006, some analysts predicted annual sales of $3 billion. In fact they topped out at $600 million, but only after a period in which Sepracor spent more than $300 million annually on TV ads featuring a fluttering moth.

So with Ambien now generic, and with plenty of older generics already on the market, in addition to non-prescription methods and booze as options for the insomniac, it's safe to assume that Silenor's sales will be less than that Lunesta's.

Davis also estimates that Silenor could be launched on the cheap for $150 million -- sales reps, TV ads and all. That means the new drug must make at least $150 million annually to be profitable. If that's the floor for costs and the ceiling on revenues is $600 million, the opportunity for an acquirer is narrow indeed.

Image by Flickr user planetchopstick, CC.