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DepoMed, Inc. (NASDAQ:DEPO)

Q4 2008 Earnings Call Transcript

March 5, 2009 5:00 pm ET

Executives

Matt Gosling – VP and General Counsel

Carl Pelzel – President and CEO

Mike Sweeney – VP, Product Development

Tammy Cameron – VP, Finance

Analysts

Scott Henry – Roth Capital

John Borzilleri – GRT Capital

John Gordon – Deltec Asset Management

Operator

Good day everyone and welcome to the DepoMed fourth quarter 2008 and year-end financial conference call. As a reminder, today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Matt Gosling. Please go ahead.

Matt Gosling

Good afternoon. This is Matt Gosling with DepoMed's Investor Relations Department. With me today are Carl Pelzel, President and Chief Executive Officer at DepoMed; Tammy Cameron, our Vice President, Finance; and Dr. Mike Sweeney, Vice President, Research and Development. At the close of market today, we issued our financial results for the fourth quarter and year ended December 31, 2008. They can be accessed from our 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 annual report on Form 10-K and our most recent quarterly report on Form-10Q.

I will now turn the call over to Carl Pelzel.

Carl Pelzel

Thank you, Matt. Good afternoon and thank you for joining us for DepoMed's fourth quarter and year end earnings call. I would like to start our call today by acknowledging the challenging economic environment we are currently operating in and the importance it places on prudently using our cash position and leveraging our portfolio and technology to generate additional cash. In that regard, we are extremely pleased that we are able to sign two partnerships with Solvay and Covidien in the fourth quarter of 2008, which have greatly enhanced our current cash position and our future cash prospects. We anticipate several significant milestones in 2009, including top line results for our ongoing Phase III PHN and hot flash studies and results from our trial and Parkinson's patients. In the mean time we are advancing well on our 2009 goals. We finished 2008 with a strong cash position of $82.1 million compared to $85.5 million at the end of the third quarter of 2008 and $69.5 million at the end of 2007. I should note that the cash balance at the end of the fourth quarter does not include the $25 million cash payment we received from Solvay pharmaceuticals on February 25th of this year. Our strong cash position is a direct result of achieving all of the 2008 financial and operational goals announced at the start of the year and a company-wide philosophy which has thousands rigorous expense management. Let me briefly recap our goals for 2008 and how we scored on them. I would then go into more detail in each goal and then I will revive our objectives for 2009.

First, we said out to rigorously manage cash and build our cash position. We ended the year with $82.1 million, including $9.4 million in debt, compared to $69.5 million at December 31, 2007. Our second goal was to partner Glumetza with a committed partner who needed Glumetza to be successful and who could allocate significant sales reps to the effort. We partnered with Santarus in July and we were thus able to eliminate DepoMed costs associated with the continued promotion of Glumetza. Third, we sort to develop and partner DM-1796 and DM-5689. We partnered DM-1796 to Solvay in November and both products are advancing well in their Phase III development. Fourth, we recognized the need to advance our early stage pipeline. We initiated our DM-1992 program in Parkinson’s with a grant from the Michael J Fox foundation. Our final goal was to resolve our law suite against Teva. In April, we settled with Teva for $10 million in cash and royalties. Now not only do we benefit from the settlement in terms of the cash infusion and the reduction in legal cost and management time spent on the law suit, but the law suit itself significantly strengths the IP protecting our core product assets. With those goals achieved 2009 is a critical execution year for us. We have established the following goals for the organization in 2009.

First, effective manage cash and maximize our revenue opportunities. There are a number of components to this goal. Now for least of which is extracting value from non-core assets and continuing commoditized value of our AcuForm Technology through strategic deals such as the recent Covidien deal. Second, we will complete the three Phase III studies of DM-1796, DM-5689, and report results in 2009. Third, we will complete a Phase I trial of DM-1992 in Parkinson’s disease. We will also further advance our pre-clinical pipeline and seek new product development candidates were our technology may provide significant patient benefits. Fourth, we will complete two of the potential four formulations for Covidien, which would trigger modest milestone payments. I would like to expand on how we achieved our 2008 objectives and how we will execute on our 2009 goals. Our first goal was and will continue to be to effectively manage our cash and enter into strategic deals that bring in more cash. We do this by carefully monitoring our expenses and maximizing our revenue opportunities. Our operating expenses for the year 2008 were $46.2 million. We received an upfront cash payment of $25 million from Solvay only last week and we anticipate further pre-commercial development milestones of up to $70 million, up to $300 million sales milestones and royalties of 14% to 20% of products sales. This potential future income stream alone could significantly alter the financing needs and risk profile of DepoMed and lift the company to the next level of valuation.

The deal was highly strategic because DepoMed has arrived first negotiation. A co-promotion rights in the OB/GYN field, if Solvay elects to develop DM-1796 in fibromyalgia and we retained all rights to DM-5689 for hot flashes. We received an upfront payment of $5.5 million from Covidien in the fourth quarter of last year and could receive up to $64 million milestone payments. Covidien deal was a blue print for our future technology deals. We made a conscious strategic decision in 2008 to exit the fee for service feasibility deals. We structured the Covidien deal with an upfront that helps us finance our operations and we retained promotion rights to four products in the OB/GYN field without being required to finance the development of those products. We want to build a portfolio of women’s health products most cost efficiently by leveraging the value of our internal assets such as our technology and we delivered on that. In 2009, we will seek to monetize the value of our AcuForm Technology through additional strategic deals. Our objective with strategic technology license deals like their Covidien deals is to help finance our operations and reduce our reliance on capital markets with payments from the deals.

In addition, we will continue to extract values from our non-core assets through additional partnerships for divestitures. For example, we are looking to sell US rights to program, revenues from the product have been nominal our promotion agreement with Watson expires at the end of this year, so we are looking to partner the asset. We have also begun the process of partnering our GERD and Parkinson’s program. These activities will help us focus on our core priorities. Our second goal in 2008 was to partner Glumetza. In July we entered in to a promotion agreement with Santarus for Glumetza, since then its annual gross revenue run rate has grown to approximately 32 million annualized based on the current prescription run rate and the price of the product. In 2009, we will work with Santarus to continue the positive momentum we have seen in revenue. We are encouraged by the growth in new prescriptions we have seen Santarus began promotion in October. New prescriptions over the four weeks ended February 13th are up more than 20% relative to the four weeks ended September 26, 2008 before Santarus began promoting Glumetza. We see new prescriptions as an indicator for promotional response and future revenue growth. Total prescriptions are up 6.9 for the same period. Let me now turn the call over to Dr. Mike Sweeney, who will discuss our clinical programs. Mike?

Mike Sweeney

Thank you, Carl. Our set goal in 2008 was to develop and partner DM-1796 and DM-5689. In 2009, we expect to complete clinical development for both programs. With DM-1796, we started the Phase III trial in PHN in March 2008. Enrollment from the trial has now caused 60% and is approaching two-thirds with patients being enrolled in the US, Russia, and Argentina. We believe that we are seeing more patients naive to Gabapentin outside the US with a high disease burden, which could be an advantage in terms of reaching statistical significance. We expect patient recruitment to be completed by the end of August, which bring us close to realizing our milestone on royalty payment streams from Solvay. Our policy with Solvay for DM-1796 is excellent. We are glad to have selected such a strong partner committed to the nero science field. We have already initiated in the (inaudible) management team comprising members of both companies and are actively collaborating them on development activities on timelines DM-1796.

Turning now to DM-5689. Our two Phase III trials in menopausal hot flashes Breeze 1 and Breeze 2 began in September and October of last year. We completed the enrollment of more than 540 patients in Breeze 1 on February the 27th. Meanwhile Breeze 2 is more than two-thirds in road, so we expect the recruitment of Breeze 2 to be completed not later than the end of May 2009. A course to treatment in Breeze 2 is three months shorter than Breeze 1. So, we currently expect to announce top line results for them simultaneously as in the fourth quarter of this year. And we also expect to announce top line data for the PHN Phase III trials at approximately the same time in the fourth quarter.

Our outlook [ph] in 2008 was to advance our early stage pipeline. We are grateful to Michael J. Fox Foundation, sponsored our preclinical drug study and help us advance our DM-1992 program in Parkinson’s. Positive results of our preclinical pharmacokinetics study founded all the cash lease formulations extended the release and significant increased the buy availability of Levodopa compared Sinemet CR in dogs. Sinemet CR is a commercial available sustained release Levodopa/Carbidopa formulation. Our PK/PD [ph] modeling data has indicated that twice a day daily dosing confluents with a relatively constant Levodopa blood concentration might be possible. And this will be a significant clinical benefit compared to the Chorin [ph] treatment regimen, which many patients involved taking Levodopa as many times as eight per day. Subsequently we have initiated a Phase I trial which is designed to compare pharmacokinetics of Parkinson’s patients up two formulations of DM-1992 and an FDA approved genetic valuation of Sinemet CR and we expect to report this year which we hopefully lead to a partnership plus further payment streams and most importantly significantly patient benefits.

Carl Pelzel

Thank you very much, Mike. Let me turn the call over to our Vice President of Finance, Tammy Cameron, so she can take us through our financial results for the fourth quarter. Tammy?

Tammy Cameron

Thank you, Carl. Revenue for the year ended December 31, 2008 was $34.8 million and included a one-time recognition of $6.3 million in product sales of Glumetza related to previously differed revenue compared to $65.6 million for the year ended December 31, 2007, which included a one-time recognition of $48.6 million in revenue associated with the termination of the companies license and supply agreement with this three Pharma in July 2007. Operating expenses for the year ended December 31, 2008 were $46.2 million, and included a one-time gain of $7.5 million on litigation related to the Teva settlement, which had the effect of reducing operating expenses for the year. Operating expenses for the year ended December 31, 2007 were $15.4 million, and included a one-time gain of $29.6 million on termination of the company’s promotion agreement with King Pharmaceuticals related to GLUMETZA, and a one-time gain of $5 million on termination of the Esprit agreements, both of which have the effect of reducing operating expenses for the year. Stock-based compensation expense was $2.3 million in 2007 and $2.5 million in 2008.

We had a net loss of $15.3 million, or $0.32 per share for the year ended December 31, 2008, compared to net income of $49.2 million, or $1.05 per share, for the year ended December 31, 2007. Net loss for the year-ended December 31, 2008 included a one-time gain of $7.5 million on litigation related to the Teva settlement. 2008 net loss also included a one-time recognition of $6.3 million in product sales of Glumetza related to previously deferred revenue, which have the effect of reducing net loss by $5.3 million. Net income for 2007 reflected the one-time recognition of $48.6 million in revenue associated with the three Pharma arrangement and one-time gains of $29.6 million and $5 million associated with the termination of the King and the three arrangements. Cash, cash equivalents and marketable securities were $82.1 million as of December 31, 2008 compared to $69.5 million as of December 31, 2007. Let me turn the call back to Carl to wrap-up.

Carl Pelzel

Thank you, Tammy. For 2009, we are providing expense guidance as we have in the past. Given the importance of cash in this economy, we are also providing ending cash guidance for the first time. First, we expect SG&A expenses to be in the range of $18 million to $20 million, excluding any promotion fees paid to Santarus, which run through our income statement as a selling expense. That compares to $21.5 million in 2008, we expect 2009 R&D expenses to be in the range of $34 million to $37 million of that amount approximately $18 million are related to external costs for our ongoing Phase III studies. So, we expect our total 2009 R&D and SG&A expenses to be between $52 million and $57 million that compares to a final year-end number of $48.9 million for 2008. Again, please note that the expense figures I just mentioned exclude promotion fees to Santarus. We expect to end 2009 with $57 million to $62 million in cash, which will include approximately $6.3 million in debt. However, in order to be as conservative as possible this cash number does not assume any success in monetizing non-core assets or any success related to milestones from existing deals in our operating plan. This is a worst case scenario budgeting. Therefore any few related milestones increases in Glumetza sale and business development deals will all be upside to this cash picture.

Given our recent track record in generating cash, I am confident in our ability to continue to enter in a deal and deliver cash generating milestones. It will further strengthen our balance sheet and our all important financial runway. It is important to note that the cash we spend in 2009 will lead to data from three pivotal registration trials that we believe will significantly increase shareholder value in the near-term. To recap, we believe we are well positioned in the current and future macro economic environment with a strong position of $82.1 million at the end of 2008 and a $25 million upfront payment we received from Solvay in February of this year. Compared to most of our peers our cash position is sufficient to sustain what looks to be a prolonged recession and we have multiple late stage milestone events this year and multiple near-term commercial product opportunities that can propel us to profitability. Our strategic objective is to build a valuable portfolio of multiple products over the next few years targeting a specialty field such as women’s health, so that the revenue stream of those products could drive us to profitability through a combination of partnerships and proprietary commercial capabilities. Our recent market research regarding the hot flash opportunity of DM-5689 supports our market potential and product profitability assumptions. Physicians and patients are egger and looking for an alternative non-hormonal treatment for hot flashes. I am pleased with the performance of the company and the employees of DepoMed whose hard work and dedication have contributed to our success. As this year unfolds and we achieve the milestones in front of us, I expect our shareholders will benefit from the company’s accomplishments. And with that we would like to open up the call to questions.

Question-and-Answer Session

Operator

Thank you so much. (Operator instructions) We will go first to Scott Henry with Roth Capital.

Scott Henry – Roth Capital

Thank you, Carol. Just a couple specific questions and then the big picture questions. And I might have missed a couple of things, but could get on a little late. First in Q4 you reported about $73.3 million in product sales, what was the split up? Is most of that Glumetza? When I say most, I mean 98%?

Carl Pelzel

Yes. Most of it is Glumetza Scott.

Scott Henry – Roth Capital

So 7 – let’s say it is $7.2 million Glumetza that looks a little above script, was there deferred revenue that popped in that quarter as well.

Carl Pelzel

Tammy.

Tammy Cameron

Scott, I can answer that for you. Yes, we did – on Q4, we put the revenue recognition in Q3, which was a $6.3 million increase. Q4 would be primarily –

Carl Pelzel

I think in Q4 we have began to see over the build in inventory of scripts come up so the pipeline is little bit fuller – has been, and I think that is the result both retailers and wholesalers recognizing that we now have a 350 million sales force on board, so they are more likely to stock more inventory.

Scott Hendry – Roth Capital

And Carl, what did you say was your first goal in 2009? I had the other four, but the first the first.

Carl Pelzel

That as it has been that is to maintain and build cash.

Scott Hendry – Roth Capital

Okay. You know I guess – I am a huge fan of yours and I think you really did a tremendous amount in 2008 and I give you all the credit in the world for that, but when I look at your goals for ’09 you may look a little conservative to me, I mean the three studies having results that is going to happen. Would you care to list any stretch goals? I know you guys had a pretty good ’08, you certainly want to keep the pressure up?

Carl Pelzel

Well absolutely and to be honest any additional stretch goals might involve an additional expenditure for example doing additional clinical trials in earlier programs and frankly in this environment I would like to wait and see the results for the PHN trial, which if positive will give us a feeling of comfort that they will be able to capture the additional 70 million in free commercial milestone and then like to see the results obviously of the hot flash trial before I go forward and spend additional cash. So, we have internal, very aggressive internal goals as it relates to expense reduction and manufacturing activities getting ready for Solvay’s demands and bringing new products to a point where we would be spending external dollars. So, we have a strong series of programs internally identifying the next series of products, but I really don’t want to spend external dollars on those until I see the results of these major events in 2009.

Scott Hendry – Roth Capital

That’s fair. It really is the results here and I will be the first to say, if you can sell Proquin XR a third time I will consider that a stretch, but it was a great ’08. Shifting to some of the guidance, SG&A – if – think I missed the first part, but it was 18 to 20 is that the number you came in at?

Carl Pelzel

Yes sir.

Scott Hendry – Roth Capital

Okay. Well how much of that do you think is G&A?

Carl Pelzel

Tammy, give a sense of that.

Tammy Cameron

I think the bulk of that would be G&A making its end point through there.

Carl Pelzel

You know if we break it out most of SG&A is G&A. A significant part of R&D is really hedge, and although it is really individuals doing work. So, we have said that there is 18 million in external out of pocket cost in that R&D number and the balance really represents the balance of the headcount associated with the company, which currently stands at 85.

Scott Hendry – Roth Capital

I guess my only question would be and again I think you have done a great job, so don’t mean – I am just thinking of moving forward, I mean 20 million that is kind of a lot in G&A for a company of your size. I mean if we are seeing nothing else in this marketplace, you know company is over weighting G&A are certainly paying the price for that. I mean do you have any thoughts I mean is there a reason why that couldn’t be 10 million.

Carl Pelzel

Yes, there is. You know about 18 months ago, we reduced the size of the company from about 110 people to 85 and that is where we stand today and we are as tight a ship as we can be, we spent about a million in consultants so that we don’t have to hire full-time people. So, we are constantly balancing between the people we have on board and doing the work that comes in the door with consults when possible. So, the majority of that are individuals and we are running a very lean shift. If you look at us in terms of being an almost fully integrated pharmaceutical company we are very, very efficient. So, not only do we do manufacturing, but we do quality control, quality assurance, we have a full-regulatory group and not only do we do clinical trials, but we also manufacture and distribute product and that involves a lot of activities that are initially apparent for example managed care contracting pricing, accounts receivable, so there is a lot in there and while everyone in this environment would like all those numbers to be less, I feel we are running very, very lean.

Scott Hendry – Roth Capital

Okay. I am just – as an observer, and I could take this off line with your, it just looks like a lot for G&A as does the base R&D of $20 million for a company of your size, we need a pretty substantial numbers, but as you mentioned you are fully integrated. I don’t know I mean you must always review those I imagine in terms of what you can out license, but – if you ever do get back clinical data that money goes pretty quick?

Carl Pelzel

Yes, true.

Scott Hendry – Roth Capital

Okay. And then just shifting over to the pipeline I think you guys were pretty clear with your guidance. I guess the GERD program, how should we think about that from here?

Carl Pelzel

You know, we are talking to folks and I don’t want to get into that vicious cycle of saying that we are constantly in discussion, but our intent is to out license that. We feel that we have the data necessary to convince partners of the value of the program at this time in its development and that’s been validated through initial discussions with companies, so I don’t know if that will end 2009, or early 2010 events.

Scott Hendry – Roth Capital

Okay. And then just finally, I mean on the three Phase III trials on going are there any DSMB of safety monitoring board, reviews of that data along the way – are there any inflection points that could you give you any information?

Carl Pelzel

Yes, let me turn that over to Mike.

Mike Sweeney

We don’t have DSMB review because the base product that we are working with Gabapentin has been prescribed for more than 20 million patients a year. So, we don’t anticipate any safety issues. Any (inaudible) will be line so will know the results from the annualized [ph] systems it the end.

Scott Hendry – Roth Capital

Okay, fair enough. And again, congratulations Carl on a very strong year, 2008.

Carl Pelzel

Thank you very, Scott.

Operator

And moving to our next question we will go to John Borzilleri with GRT Capital.

John Borzilleri – GRT Capital

Hi Carl I want to congratulate you on doing such a great job in a tough market. I just follow up on a few things. I just kind understand the Santarus field, I was just looking at their press release and they have reported a 4.7 million revenues related to Glumetza for the quarter and you have a seven point, whatever, which comes like 65% going to them. I know that based on the October or September can you just give me a sense of how to model this for this quarter and for the year, how we should look at it terms of the payments for them.

Carl Pelzel

Yes they will get 80% of the net sales and up until July of this year and then they will get 75% of net sales through the term of the agreement which outs with our patents. So, if you look at 2008 for a moment as a static year that they would keep as I said roughly 80% and we anticipate the product growing in there hence to the point where over some period of time we would expect the revenue that we are sharing in with this split to get us back to where we were when we were not partnering the revenue at all.

John Borzilleri – GRT Capital

Okay, now – just – so this quarter comes out with something like 65%, they are booking now, how does inventory play into it and all that?

Carl Pelzel

Yes. No they are taking 80% of the gross margin.

John Borzilleri – GRT Capital

So, it’s only on products actually sold, not when it deploys it?

Carl Pelzel

That’s right.

John Borzilleri – GRT Capital

Okay –

Carl Pelzel

No, I am sorry. It is product sold into from – next factory sales. So, it is product that we, DepoMed sell through (inaudible) out to wholesalers and whether that product goes into a wholesaler’s inventory or whether it goes directly to a retailer isn’t impacted. So, we flipped revenue last year and prior to that we counting on revenue based on prescription. We are not longer doing that.

John Borzilleri – GRT Capital

Okay. So then, why wouldn’t it not be the – why would they not be booking 80 – if we presume the 7.3 virtually Glumetza if we have met them why would their numbers would be 4.7 there?

Carl Pelzel

Tammy?

Tammy Cameron

John, this is Tammy. The 7.3 that you are talking about is our product sales and they are getting paid 80% of gross margin for Glumetza, so you have to back out the cost of sales from that number to get –.

John Borzilleri – GRT Capital

Oh, I am sorry, you are right. Okay, I apologize for that. I will run through that, now – then the royalty line is surely from – what does the royalty line pertain too?

Tammy Cameron

The royalty line is made of the IVAX, the Teva, royalty payments that is coming through us based on the settlement, we have all amounts from Biovail, but the bulk of it is due to severance settlement.

John Borzilleri – GRT Capital

Okay. The UN cash flow you mentioned it looks like you are going to burn about 11 million a quarter pretty much in line with this quarter, is that about right?

Carl Pelzel

Not. It is pretty close.

John Borzilleri – GRT Capital

Okay. That is pretty good note. Is there any variation that you are going to burn more in the first half, while you are involving right in the second half?

Carl Pelzel

You know, we are not going to give guidance quarter-by-quarter because I mean it is just – it is difficult to anticipate exactly when that specialty clinical trial cost come in.

John Borzilleri – GRT Capital

Okay. Alright now are you able to give any more granularity on potential crew commercial milestones from Solvay meaning if the Phase III is positive do you get money on that?

Carl Pelzel

Yes, we haven’t given any further visibility to that other than as you said that it is free commercial, so it doesn’t those $70 million do not depend on any kind of commercial success.

John Borzilleri – GRT Capital

Okay. Now have they or you or have said anything about having of an FDA if at all positive?

Carl Pelzel

I am sorry positive, what was the question?

John Borzilleri – GRT Capital

I am just wondering you or Solvay have said anything about the timing of the NDA with positive data?

Carl Pelzel

I am sorry. No, I don’t think we have.

John Borzilleri – GRT Capital

Would it be – would it happen reasonably quickly after the data?

Carl Pelzel

It will be within industry norms, between three months and six months after the final data is available.

John Borzilleri – GRT Capital

Okay so there was nothing, I mean as you pretty much set with other things like manufacturing’s and safety data and all that?

Carl Pelzel

Absolutely. As you know unfortunately, we repeat up to file the NDA a couple of years ago. So all of that was well in place, when we got the result from the last trial.

John Borzilleri – GRT Capital

Last thing I want to ask you is, this Parkinson’s product sounds quite interesting to me, now can you provide a little bit more detail about what this Phase I trail is about the number of patients and what clinical end points you are looking at?

Carl Pelzel

Sure, let me ask Mike to take you through that.

Mike Sweeney

It is a small steady and what we are looking to do is reproduce the results which in the dog model, in patients with Parkinson’s. So, the patients will have a single dosage of formulations and of our two formulations and of our comparator Sinemet CR generic and what we are going to demonstrate we hope that the bioavailability is much greater, the peak is more prolonged, the overall profile is much smoother, and based on that we can then model what we would need to do in phase II or III study.

John Borzilleri – GRT Capital

And is this being done in actual practice in patients or healthy volunteers?

Mike Sweeney

Oh, no. Actual process is in patients, because we decided that – because the stomach of a Parkinson's patient, GI motility differs greatly compared to a normal volunteer. So we wouldn't actually gain anything from normal volunteer data. We still – our (inaudible) would still be exactly the same. We had to do a Phase I in Parkinson's, so we went straight to that.

John Borzilleri – GRT Capital

Okay. Now and remind me, is Levodopa preferentially absorbed in the duodenum which goes along with the technology and is that how it works?

Mike Sweeney

Exactly.

Carl Pelzel

Yes, it’s absorbed at one singular anatomical site, John. It is called the duodenal cap, and so it is very small, very restricted. And an example of that is that Solvay is working on a pump, an implantable pump that will actually deliver Levodopa directly via a catheter to that site of absorption. So it is a perfect fit of the technologies you alluded to. And just let me mention, the other reason we did this study in patients in addition to the scientific fact that Mike outlined is the fact that we new in talking to potential partners that that would be compelling enough data positive to lead to a partnering event as opposed to the kind of information we would be able to provide the partners if it were normal healthy volunteers.

John Borzilleri – GRT Capital

And you think you get terms with such – now you didn’t, Mike didn't say how about the numbers, what’s the N in the trial?

Mike Sweeney

18, but each patient is his or her own control. So every single patient is dosed with all three of the formulations, obviously at different times and with an appropriate washout period.

John Borzilleri – GRT Capital

Okay. Now you don't think you'd need the peak dosing study to get the kind of terms that you want?

Mike Sweeney

No, because the relationship between Levodopa blood levels and efficacy in Parkinson's patients has just been so well established that partners are readily admitting that if we can demonstrate an improved blood profile with a single dose that they will accept as a surrogate for clinical efficacy…

John Borzilleri – GRT Capital

Okay. Very last one, I just want to ask, and sorry for taking for so much time. Now, I am very happy to see that Santarus seems to be doing well with Glumetza, now I think the last time I heard you talk about this was basically stable at $20 million run rate, now you are saying 32, is that right?

Carl Pelzel

Yes. That includes the price increase that we had, I believe it was 8% in January of this year.

John Borzilleri – GRT Capital

Okay.

Carl Pelzel

(inaudible).

John Borzilleri – GRT Capital

And any new thoughts on how big it could ultimately be, and have they gotten on to new formularies, new PBMs or whatever in order to get a greater share?

Carl Pelzel

We feel very good about how they are doing. We have done some additional contracting, we haven't made that public. But they are getting a lot of success, physician by physician. As we mentioned, we're seeing new prescriptions pick up, so we are very enthusiastic about the potential for the product, especially since we see a lower degree of promotion surrounding Fortamet products.

John Borzilleri – GRT Capital

Okay. And the patent goes to when in Glumetza?

Carl Pelzel

2020.

John Borzilleri – GRT Capital

Okay. Carl, thank you very much. Thank you all.

Carl Pelzel

Thank you, John.

Operator

(Operator instructions) We will go next to John Gordon with Deltec Asset Management.

John Gordon – Deltec Asset Management

Carl, good afternoon.

Carl Pelzel

Hi John.

John Gordon – Deltec Asset Management

Let me also congratulate you on hell of a 2008. I have a bunch of questions sort of bouncing around a little bit like a pinball, so I apologize for that. But just following upon the last questioners increase about the Parkinson’s initiative, I guess one thing I would be curious about is how easy was it for you to find 18 patients because if it took a while to find them, that would say one thing, if there was a waiting line outside your headquarters the next day after you announced it, that would be another thing.

Carl Pelzel

Yes John. Actually it was very easy. Mike Sweeney went to the top neurology center in Russia and found them pretty easily. So that has a couple of advantages, number one, we could start sooner than we could have if we were in the US. And because of the treatment of patients in Russia and many ex-US countries is hospital-based, it was relatively easy to capture the number we needed. We don't have them all enrolled yet, but it was not a big hurdle for us, and our intention is not to do registration trial. So we would look to a bigger partner than to look for patients in whatever country they might hope to pursue registration in.

Mike Sweeney

Another big ethical advantage, Levodopa is not reimbursed in Russia, so we don't actually have to take patients off existing medication. We can just put them straight into the study.

John Gordon – Deltec Asset Management

Right. Okay. And then Carl, when you are talking about the total expenses, you twice referenced something to do with potential payments to Santarus, I couldn't quite understand is that what you're referencing?

Carl Pelzel

Yes. I just want to make sure that we were completely transparent when we talk about our expenses in that there are payments to Santarus, in other words, we paid a promotional free if you will, that’s 80% of the gross margin until July of this year and then it goes down to 70%. So you will see – when we played at to them that goes through our financials as an expense. But it is off that by the revenue coming in.

John Gordon – Deltec Asset Management

Okay. So you weren’t flagging the actual cash expenses might be higher than what you just identified as the 52 to 57. You’re just flagging for us that there may be a wash transaction in there?

Carl Pelzel

Exactly.

John Gordon – Deltec Asset Management

Okay. Now, with respect to the initiatives concerning the early pipeline development putting aside Parkinson's, but you made some sort of oblique references to things going on in that area, and I am just curious, as a directional arrow matter, when you are looking around for other potential applications and therefore presumably people that might be interested parties, is it you hunting and pecking, looking for new initiatives, or is it people calling DepoMed up saying, gee, I have heard about you and your delivery mechanism, and I would like to you to look at what I am interested in?

Carl Pelzel

Yes, very good question, and we weren’t very explicit in the call. It is actually both. For example, the Covidien deal came about from by a call from their president into us indicating that they had looked at a variety of technologies and recognized that what they were trying to do need gastro protection [ph] and so they wanted to talk. On the other hand, the Parkinson's program was an organic program. We have a group that meets every other week in the company, we call them the opportunity assessment team, and their job is to look at all the compounds that are available and try to identify a unique fit between a product’s characteristics and the ability of our technology to provide real patient benefit. And just over the last two weeks, we have had focus groups, one group with OB/GYNs and another one with neurologists where we took them through their practice and our technology and came up in both cases with some very interesting product fit. So we actually do both.

John Gordon – Deltec Asset Management

Okay. And then there clearly was an impact in the greater healthcare area last week when President Obama graced us with his budget proposals and I'm just curious as to whether your reaction to what he was proposing in the greater healthcare area made you feel better, the same, or worse than you had felt before you heard it?

Carl Pelzel

As an individual, it made me feel worse. But as someone that is concerned about the healthcare of many folks who don't have insurance, I think it made me feel better that the government is focused on that. From a purely DepoMed perspective…

John Gordon – Deltec Asset Management

Yes, I meant DepoMed, yes, DepoMed perspective.

Carl Pelzel

Yes. I was going to get there.

John Gordon – Deltec Asset Management

Okay.

Carl Pelzel

From a purely DepoMed perspective, to be honest, two perspectives. It made me feel better because I know that big pharma is not going to be able to deliver enough meaningful compounds to meet their growth projections. It just isn't going to happen. And so that is good for us, because then we will have more calls as we have from the Covidiens of the world and we will have more folks interested in the Parkinson's and their programs. So from that perspective, it is good for is. They other part of that is the potential that the government may at some point start negotiating individual prices with pharmaceutical companies for product and that gives me some anxiety. However, I feel that the products we are developing are not me-too products as many of the NCEs are, but are products that can withstand scrutiny. And if someone is trying to get our Parkinson's product reimbursed, if we need the product profile, I think we will be better positioned than they many new NCE products to justify a premium price because we again it meets the target profile would be able to change the lives of many Parkinson's patients to the better.

John Gordon – Deltec Asset Management

Okay. And then, as it relates to the Glumetza, you mentioned that Santarus has this bigger sales force that is helping to increase revenues, but what if anything is happening on the formulary front to make any difference, or is it all just Santarus sales people?

Carl Pelzel

Well we have – actually we have a very good formulary position. We are on most formularies in an unblocked open tier 3 position. In addition to that as we have talked about before, the care mark of long CDS situation is such that we have anywhere between 60 and 70 to 80 million patients who have access to our products from a tier 2 perspective. So that is really good, good tier 2 access and then unfettered access at tier 3. So now we need to see those 350 reps take advantage of that and bring the scripts up.

John Gordon – Deltec Asset Management

And then Carl, just finally, I think you said it but I didn't catch it, with respect to the 18 patients in the Parkinson's trial, what time frame would you like us to have in mind with respect to when we might hear results?

Carl Pelzel

Yes. As said we have actually dosed the first patient and just give you a sense of how carefully we progress with these trials styles, we actually had pharmacokinetics bedside when the first dose was delivered to the first two patients. So we don't do this from afar, we make sure that we protect your assets and ours as carefully as we possibly can. And we really haven't said when we would have data but it would certainly be this year.

John Gordon – Deltec Asset Management

Because I mean just as a choreography matter, as it relates to each patient, it actually isn't that long a trial, is it?

Carl Pelzel

Well we had to have that –- sorry, we have to have a significant washout period. So the trial will go close to mid year and so as far as just execution and so until we see a ramp, John, and until we make sure that once we dose patient A, that we can get patient A back in for the second and third doses, until we see that play out, we would like to be a little close to the vest on promising time lines.

Mike Sweeney

Don't forget, John, these are very frail patients. So we have treated them very gently and very slowly.

John Gordon – Deltec Asset Management

Well, can I just ask in that regard one last question and then I will step aside, but I mean I would have thought given that you are dealing with patients that happen to unfortunately have the disease, that in fact this might be a trial where there could be water cooler buzz one way or the other about how it seems to be going?

Carl Pelzel

Well, it is just one dose. So the patient probably won’t with that one dose exhibit something a change in relief, at least we're not expecting that, not counting on it, won’t be a part of our results that we report. It is strictly going to be blood level. Having said that, we have gotten a lot of water cooler discussion in the US, and I have been approached at presentations, and of course Michael J Fox’s group is very excited about this as is the Parkinson's Institute that is just down the road from us. So I think there is quite a bit of excitement about the product.

Mike Sweeney

From the scientific perspective to (inaudible) speculation, if somebody is paying less attention to you in a hospital, and treating you like a god, you'll feel better. Let’s wait for the results.

John Gordon – Deltec Asset Management

You mean, that is the same as the placebo effect that has bitten us in the fanny.

Mike Sweeney

Well, we will wait. We will have results, don’t worry.

John Gordon – Deltec Asset Management

Very good. Keep up the great work, gentlemen.

Carl Pelzel

Thank you, John.

Operator

And with no further questions in the queue, I would like to turn the call back to Carl Pelzel for closing comments.

Carl Pelzel

Thank you very much. Thank you for joining us on this call and I look forward to keeping you apprised of our progress in the coming months. And as always, if there are additional questions that arise later, please just call the company. We will be glad to discuss those with you. Thanks very much.

Operator

And again that does conclude today's conference. We appreciate your participation and wish you all a great day.

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Source: DepoMed, Inc. Q4 2008 Earnings Call Transcript
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