Depomed, Inc. Q3 2008 Earnings Call Transcript

Nov.20.08 | About: Depomed Inc. (DEPO)

Depomed, Inc. (NASDAQ:DEPO)

Q3 2008 Earnings Call Transcript

October 30, 2008, 5:00 pm ET

Executives

Ina Cu – IR

Carl Pelzel – President and CEO

Mike Sweeney – VP, Product Development

Analysts

Scott Henry – Roth Capital

Operator

Good day, everyone, and welcome to the Depomed Third Quarter 2008 Financial Conference Call. As a reminder, today's conference is being recorded. At this time, for opening remarks and introductions, I would like to turn the call over to Ms. Ina Cu in the Investor Relations Department. Please go ahead.

Ina Cu

Thank you. Good afternoon everyone.

This is Ina Cu in Depomed's Investor Relations Department. With me today are Carl Pelzel, President and Chief Executive Officer at Depomed, Tammy Cameron, our Controller and Principal Accounting and Financial Officer; and Dr. Mike Sweeney, our Vice President of Product Development. At the close of market today, we issued our financial results for the third quarter ended September 30, 2008. They can be accessed from the company website at www.depomed.com.

Before we begin, I would like to remind you that during this call we will be making forward-looking statements related to various aspects of our business, including statements related to clinical development, financial matters, and commercialization of our marketed products. Actual results may differ materially from the results described. We encourage you to review the risk factors in our most recent quarterly report on Form 10-Q.

I will now turn the call over to Carl Pelzel.

Carl Pelzel

Thank you, Ina. Good afternoon and thank you for joining us for Depomed's third quarter earnings call.

I would like to start our call today by acknowledging this unprecedented economic environment we are currently experiencing. Clearly, this has been a quarter unlike any other. All our stock has suffered with the rest of the market. I am pleased to announce that fundamentals of the company have gotten stronger and that we had a good quarter and achieved several key milestones.

On our call today, I will review the highlights of the quarter then discuss our financial results in more detail. Our goal is for fiscal 2008, which is to rigorously manage cash, partnered Glumetza, develop and partner DM-1796 and DM-5689, our Gabapentin programs, advance our early stage pipeline and to resolve the IVAX lawsuit. I'm pleased to report we are delivering on those objectives.

First, we continue to rigorously manage our cash. We are carefully managing our expenses as evidenced by the reduced expense guidance we will discuss later in the call. We are using our partnerships to allow us to more cost effectively fund our commercialization effort. We have a cash balance of $85.5 million as of the end of the third quarter, up from $71.2 million at the end of the second quarter of this year. We are working diligently to advance our partnership efforts and anticipate additional cash from these activities. You may have seen the reports from Rodman & Renshaw that shows a number of public biotech companies with less than a year's worth of cash are up by more than 65% since the first quarter to a 113 companies. I'm sorry to see this but I am happy to report that we have enough cash to comfortably complete our late-stage clinical programs.

As for partnering, Glumetza was partnered with Santarus in July of this year with an up-front payment of $12 million, and we retain promotional rights for the OB-GYN space. This was timely with our 1000-mg tablet launch in June of this year. Glumetza is currently being promoted by 300 highly motivated sales representatives who have been honing their skills in the very competitive PPI market with Zegerid. We are confident Santarus has the ability to enhance our market credit penetration providing us with additional royalty revenue and milestones to support our development activities.

In addition, during the quarter we entered into a contract with CVS Caremark, the nation's largest pharmacy benefit management company, which has Glumetza available to its members as a tier 2, brand preferred metformin for the treatment of diabetes. This should positively position Glumetza as the branded metformin of choice for physicians who care for patient whose benefits are managed by Caremark.

Regarding the development and partnering of DM-1796 and 5689, the new pivotal registration Phase 3 clinical trial in PHN that we started in March is progressing well. The study has a 450 patient placebo-controlled, double-blind trial with a 10-week stable treatment period. In addition, after a successful end of Phase II meeting with the FDA related to DM-5689, our hot flash program, we initiated Breeze 1 and Breeze 2, our two Phase III trials for hot flashes which begun in September and October of this year respectively. These are randomized double-blind placebo-controlled studies of approximately 540 patients per study or 180 patients per hour. You may recall that the Phase II trial had only 30 patients per hour.

Now as for the status of partnering discussion, the process has been longer than we hoped, but even in these difficult economic times I remained pleased with our progress. These discussions are of course very sensitive so I am not in the position to provide additional comment today.

As for our early stage pipeline, our goal is to focus on strategic large market opportunity which represent a unique fit with our technology and which thereby afforded a high degree of product differentiation that will move the needle with patience, positions, and payers. We plan to move one quick clinical program into Phase I this year and another next year.

One of the programs is the DM-1992, our preclinical formulation of Levodopa/Carbidopa for which we'll receive a grant in June from the Michael J. Fox Foundation. Levodopa/Carbidopa is a gold standard therapy for Parkinson's disease but due to preferential absorption in the upper GI tract at the duodenal cap, current formulations failed to optimize absorption which potentially lead to fluctuations in blood levels and could be responsible for debilitating side effects and inconsistent efficacy. We believe that the delivery of Levodopa/Carbidopa can be significantly improved with our AcuForm Technology which will optimize absorption at the duodenal cap and smooth out blood level fluctuations. This solution testing conducted with our formulation compared to the market leader formulation Sinemet CR has already demonstrated a much smoother release profile over a four to six-hour period versus that of Sinemet CR which was rapidly released within about the first hour.

We are also committed to resolve the IVAX lawsuit in 2008. We successfully completed this litigation in April of this year which significantly strengthens our intellectual property associated with our technology.

Now I would like to discuss our financial results for the quarter.

Fist in terms of revenue, for the third quarter of 2008, we recognized 13 million in product sales, most of which were Glumetza product sales. Glumetza product sales for the third quarter included one-time recognition of $6.3 million in product sales for Glumetza related to previously deferred revenue as described in our earnings release. Product sales were $5.5 million for the prior quarter ended June 30th of this year compared to $3.8 million for the third quarter of the prior year, that being 2007. We structured our Santarus deal to retain top-line revenue for Glumetza and we have the potential to receive up to $16 million in additional sales milestones.

Operating expenses for the quarter ended September 30, 2008 were $12.2 million compared to $2.4 million for the prior quarter ended June 30, 2008, and $8.2 million for the third quarter of 2007. Note that operating expenses for the second quarter of this year were reduced by the $7.5 million settlement payment we received from Teva in April. Operating expenses for the third quarter of 2007 were reduced by a $5 million gain on a termination of our Esprit Pharma licensing arrangement. We improved our cost structures through the Santarus deal as our partner is now responsible for all cost of sales and marketing of Glumetza.

As a result of the Santarus deal in August, we were able to end our contract with our contract sales organization for the 33 person temporary sales force. We had nearly doubled our cash over the last four quarters without diluting our shareholders equity while fueling the development of late-stage development programs like DM-1796 and 5689, our Gabapentin programs, which we see as the near-term value drivers.

Cash, cash equivalents, and marketable securities as of September 30, 2008 were $85.5 million compared to $69.5 million as of December 31, 2007. Our cash position increased in the third quarter by $14.3 million versus the end of the second quarter of 2008. We had $9.4 million outstanding under our credit facility with Oxford and GE Capital as of September 30, 2008.

Now, you may recall that we reduced our guidance on expenses during the second quarter call. I am pleased to report that we will again reduce guidance on expenses for full year 2008. We expect our full year SG&A expenses excluding any profit share fees related to our promotion arrangements to be in the range of $21 million to $23 million and R&D expenses to be in the range of $27 million to $31 million. Approximately $8 million of the R&D expenses will be to fund DM-1796, a trial in PHN, and approximately $5 million is expected to pursue the Phase III program in hot flashes.

In summary, we are dedicated to maximize any shareholder value by focusing our product development activities on products that we believe offer significant lower development risk relative to the potential return. Not only do our products address large target markets, but more importantly our products had demonstrated clinical benefits which we believe will be a growing importance to payers as they continue to be more closely concerned around the reimbursement of new products.

Combined with our disciplined cash management, which will enable us to move our pipeline through development towards commercialization without the need for additional resources, we believe we are extremely well-positioned for the current environment as well as the future. We continue to demonstrate the strength and potential for AcuForm delivery technology, which we believe will provide additional opportunities for new product development activity as well as favorable licensing and partnering deal. Our objective is to bring together a basket of products in the next two to three years that would justify third party reimbursement and generate a strong stream of revenue propelling us to profitability.

In spite of the challenging environment, I am pleased with the performance of the company and the employees of Depomed whose hard work and dedication have contributed to our success for the benefit of our shareholders. And with that I would like to open up the calls for questions.

Question-and-Answer Session

Operator

Thank you (Operator instructions).

Carl Pelzel

Hey, operator, why don't we open up for questions?

Operator

Our first question comes from Scott Henry with Roth Capital.

Scott Henry – Roth Capital

Thank you and good afternoon. I guess just starting with the clinical timeline expectations and you may have hit on a few of these but I want to make sure that I had this right. In terms of the PHN indication, are we still looking for a data around the middle of this year?

Carl Pelzel

No. On PHN, that trial as I mentioned is progressing and we are anticipating results in 2009 but haven't been more specific about that. Reason is we have the trials up and running in the U.S. We have sites up and running in Russia. Argentina is not yet on board and we'll probably be in a better position, Scott, to give you an accurate run rate maybe at the end of this year and beginning of next.

Scott Henry – Roth Capital

Can you comment at all on where patient enrollment is?

Carl Pelzel

We'll probably do that in December.

Scott Henry – Roth Capital

Okay. And then, I guess, the Breeze 1 and Breeze 2 trials, I assume we will get data in 2010, is that correct?

Carl Pelzel

Let me ask Mike Sweeney to take that one.

Mike Sweeney

I was hoping that ours is a prevalent condition with lots of potential patients. We are hopeful that we find some data on books to these before the end of 2009. Obviously that's depending to our recruitment but we're optimistic before the end of 2009.

Scott Henry – Roth Capital

Okay, so for the shorter term line I imagine it will be 2009, and then the longer term trial will be 2010, correct?

Mike Sweeney

I am actually hoping for both of them. Don't forget the shorter term – the longer term had a headstart on the shorter term one.

Scott Henry – Roth Capital

Okay.

Mike Sweeney

So I would expect the results for them to be available around about the same time towards the end of next year.

Scott Henry – Roth Capital

Okay so I can assume enrollment is moving along pretty good on this.

Mike Sweeney

We made a good solid start.

Scott Henry – Roth Capital

Okay, as well just while we are on the R&D programs. The DM-1992 if I have that right, the Parkinson's disease program. What is the clinical benefit of that? I know you talked about a smoother release curve but I was off the call for a minute, but did you comment on the clinical benefits?

Mike Sweeney

There is a very narrow therapeutic range for all L-Dopa for Parkinson patients. Any less than this and they tend to get rigidity and freezing-off. Anymore from this and they tend to get dystonic movements and GI upset. So it is important to keep the plasma levels within the set range as long as you possibly can. The problem with L-Dopa is it has a very short half-life. So you either have to keep dosing repeatedly which has the problem that you have high pitch low drugs or alternatively if you dose less frequently the patient will run out of drug. Our idea is that our AcuForm by slowly leaking the drug in will provide constant plasma levels hopefully with a two or three times daily dosage allowing the patients to wake up without being frozen and to be fully functional throughout the whole day. To date, the only way to achieve this is an implantable intestinal pump which obviously is not practical for most patients.

Scott Henry – Roth Capital

Okay and did you – did I hear an update on the GERD program? What's the next data point for that should be?

Carl Pelzel

Sure. We had indicated, I think it was last year, that we were going to make a conscious decision not to try to partner the GERD program until we had partnered Glumetza and that's exactly what we're doing. So between this year and last year, we focused on manufacturability so the process that we are going to use to manufacture the project would be the compound and when we partnered Glumetza, we started – we're talking to partners on that program and we are talking to a variety of partners about that. So we intend to partner it at this stage.

Scott Henry – Roth Capital

Okay. I guess the final one is a bit more of a macro question for you, Carl, with regards to partnering these programs. A year ago the targets were to have some of this stuff partnered in the second half of 2008, and that's coming to a close and I am sensing less commitment to those targets. I guess I just want to get your cent about what is the environment out there for a partnership because you have accelerated a couple of the programs forward and obviously investors want to make sure that the company doesn't spread itself too thin in the event that some of these programs don't materialize with partnerships in the near-term.

Carl Pelzel

Sure, first let me say that we – our commitment to get the deals done has not changed at all, so we are pursuing that as aggressively as we have been. Has it taken longer than anticipated? Yes, but that timing is to a very great extent dependent upon the partner, partners and the due diligence that has to be done for a deal of this nature. So, A-we are pursuing those with the same drive as we did previously, second part is–we don't feel that we are overextending ourselves.

In other words, we are looking to partner products that don't fit with our basket of products for women's health. So the GERD program is not strategic for us but it's a wonderful opportunity for the technology to deliver clinical benefits. The same we think is true with the Levodopa/Carbidopa which we intend to partner. So after doing a small amount of work we intend to partner those products that aren't strategic for us and not spend a lot of money on developing them. Rather we intend to develop them to the point where we demonstrated proof of concept for partners and then use the cash from those out-licensing activities to reduce our need to raise more money and to drive our development program.

Scott Henry – Roth Capital

I guess the final question is somewhat subjective, I guess this is the extra final question, and I don't know that you'll answer it Carl but I'm going to ask it anyway. The question is, I understand not wanting to disclose specifics on anyone's negotiations for competitive reasons, but if you look over the next six months and without separating whether you are talking about PHN or hot flashes or GERD for that matter, do you place a – how would you – would you consider it a high likelihood of having a partnership or moderate or low? Just subjectively and again I preface I would not know if you will answer the question.

Carl Pelzel

Yes, I appreciate the question. I appreciate you framing it so it gives me a little bit of leeway in answering it. Yes, if you're asking about anyone of those or even ones that we haven't talked about, I think there is a very high likelihood that we will close something in the near-term without giving any indication of which of those where undisclosed ones we're talking about.

Scott Henry – Roth Capital

Well I certainly appreciate that and I will compliment you on your execution. So far you have gotten a lot of the things down that you have targeted. Thank you again for taking the questions.

Carl Pelzel

Thank you, Scott.

Operator

And Mr. Pelzel we have no further questions. I will turn the conference back over to you for any additional or closing remarks.

Carl Pelzel

Thank you. Thank you very much for joining us on this call and I look forward to keeping you apprised of our progress in the coming months. Goodbye.

Operator

That does conclude today's conference call. We would like to thank you all for your participation. Have a great day.

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