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DepoMed, Inc. (DEPO)

July 29, 2013 5:00 pm ET

Executives

August J. Moretti - Chief Financial Officer and Senior Vice President

James A. Schoeneck - Chief Executive Officer, President and Director

Michael Sweeney - Chief Medical Officer and Vice President of Research & Development

Jack Anders

Abe Wischnia - Director of Investor Relations

Analysts

Jason N. Butler - JMP Securities LLC, Research Division

Jason Napodano - Zacks Investment Research Inc.

Joy Mishaw

Operator

Good afternoon and welcome to the DepoMed conference call. [Operator Instructions] Please note this event is being recorded.

I would now like to turn the conference over to August J. Moretti, Chief Financial Officer. Please go ahead.

August J. Moretti

Thank you, operator. Good afternoon, and welcome to our conference call to discuss today's Lazanda press release. With me today are Jim Schoeneck, President and Chief Executive Officer of DepoMed; Mike Sweeney, Chief Medical Officer; Matt Gosling, Senior Vice President and General Counsel; and Jack Anders, Senior Director of Finance.

Before we get started, I'd like to remind you that the matters discussed on this call contain forward-looking statements that involve risks and uncertainties, including those relating to Lazanda sales and the impact of the acquisition of Lazanda on the future financial performance of DepoMed. Actual results may differ materially from the results predicted and past results should not be considered an indication of future performance.

These and other risk factors are more fully discussed in our annual report on Form 10-K that we filed with the SEC in March of this year, and our quarterly report on Form 10-Q that we filed with the SEC in May, most particularly under the caption Risk Factors. DepoMed disclaims any obligation to update or revise any forward-looking statement made of this call as a result of new information or future developments. As a reminder, DepoMed's policy is to only provide financial guidance for the current fiscal year and to provide, update or reconfirm its guidance only by issuing a press release, filing updated guidance with the SEC and a publicly accessible document, or providing or updating guidance on a publicly accessible conference call or webcast/investor presentation. Guidance relating to the company's expected 2013 revenues, operating expense levels and cash usage for 2013 is as of today, July 29, 2013.

I'll now turn the call over to Jim Schoeneck

James A. Schoeneck

Thanks, Augie, and thanks, all of you, for joining us on short notice for today. We are pleased to announce today that we have acquired the U.S. and Canadian rights to Lazanda, fentanyl nasal spray from Archimedes Pharma Limited, a privately held U.K. company. Lazanda's an opioid agonist indicated for the management of breakthrough cancer pain in cancer patients 18 years of age and older who are already receiving and who are tolerant to opioid therapy for their underlying persistent cancer pain. Lazanda's the only product that delivers a scheduled controlled substance via a nasal spray. Lazanda delivers fentanyl in a rapid but controlled manner, and is designed to deliver a fine mist spray to the nasal membrane. Each spray of Lazanda forms a gel when it contacts the nasal mucosa. The active ingredient is then rapidly absorbed across the mucous membrane and directly into the bloodstream.

Mike Sweeney, our Chief Medical Officer, will now talk a bit more about both the condition and the product. Mike?

Michael Sweeney

Thank you, Jim. A breakthrough pain in cancer, otherwise known as the BTPc, in intense, sudden pain is often unpredictable and debilitating, and occurs despite otherwise appropriate opioid therapy for background pain. BTPc often has a high-intensity, a rapid onset and usually reaches maximum intensity within 10 minutes on a short duration, lasting between 30 and 60 minutes per episode. The balancing of background cortical opioids with intermittent agents for breakthrough cancer pain to maximize pain relief, while avoiding sedation, is best achieved by physicians expert in administration of opioid therapies such as pain specialists.

As Jim mentioned, Lazanda is the only transmucosal immediate release fentanyl, or TIRF, available in a nasal spray. Lazanda nasal spray utilizes the novel PecSys technology to deliver rapid pain relief to opioid-tolerant patients, adult cancer patients who experience episodes of breakthrough pain. Nasal delivery avoids dosing issues associated with oral delivery, particularly in the presence of mucositis, an inflammation of the oral mucosa, frequently associated with cancer treatment. Lazanda is available in 2 dosage forms, 100 and 400 micrograms per spray. Each bottle contains 8 doses.

In clinical studies, almost 3 quarters of Lazanda patients achieve an adequate, well-tolerated dose for pain relief. Lazanda may only be dispensed to patients enrolled in the transmucosal immediate release fentanyl risk evaluation and mitigation strategy program mandated by FDA. The TIRF REMS Access program is designed to ensure in full risk-benefit decisions before initiating treatment, and while a patient on treatment to ensure appropriate use of TIRF medications. The perks [ph] of the TIRF REMS Access is to mitigate the risk of misuse, abuse, diction, overdose and serious complications, which can arise due to medication errors with the use of TIRF medications.

James A. Schoeneck

Thank you, Mike. I'm sure there will be some questions for you later. Lazanda was introduced by Archimedes in the U.S. in the second half of 2011. According to Source Healthcare Analytics, sales of Lazanda in the U.S. were $3.3 million for the 12 months ending June 30, 2013. Based on second quarter 2013 reported sales by SHA, U.S. annualized sales increased to $5.9 million in the second quarter. Please note that the sales reported by SHA do not include discounts, rebates and other deductions that affect net revenue.

Archimedes has been selling Lazanda in the U.S. with 14 contracts sales representatives, focused primarily on oncologists. After a short transition period, DepoMed will assume full responsibility for Lazanda in the U.S., while Archimedes continues to market the drug in Europe under the trade name, PecFent. We believe we can leverage our infrastructure to support the commercialization of Lazanda. We also believe our relationships and understanding of pain specialists will allow us to further grow the market for this important drug.

The purchase of all U.S. and Canadian rights to Lazanda and the available Lazanda inventory is $4 million. $1 million of cash -- of the cash purchase price was paid into an 18-month escrow. We will also pay royalties on future net sales of Lazanda and up to $16 million in future milestone payments based on sales milestones. In 2013 and '14, we will not pay royalties to Archimedes and the third-party royalties we assume could be less than 5% of net sales. Thereafter, we'll pay royalties totaling 13% to 15% of net sales to Archimedes and third parties.

The sales milestones are as follows: $1 million will be paid upon achievement of $20 million of calendar year net sales revenues; $2.5 million upon achievement of $45 million of calendar year net sales revenues; $5 million of upon achievement of $75 million of calendar year net sales; and $7.5 million upon achievement of $100 million of calendar year net sales. These are one-time milestones that will only be paid on the first achievement of each.

The acquisition was funded with cash on hand. All sales of Lazanda after today will be for DepoMed's account, so Lazanda will generate revenues immediately. With 2 Orange Book listed patents providing protection through 2018 and 2024 and no reported ANDA filing, we expect to realize Lazanda revenue for the foreseeable future.

We have stated, since last year's acquisition of Zipsor, that acquisition and in-licensing of products complementary to our existing pain franchise was a key goal for DepoMed in 2013. Lazanda has been on the market in the U.S. for 2 years and the call universe of pain specialists and oncologists for this product category is very focused. We expect modest revenues from Lazanda this year. However, we believe that we will be able to grow Lazanda sales in 2014 and beyond, and that this acquisition will provide us with additional revenues and cash flow over the next several years.

I'll now turn the call back over to Augie to provide additional comments on the financial impact of the Lazanda acquisition. And after that, we'll open the call for questions.

August J. Moretti

Thank you, Jim. We believe the Lazanda acquisition will be treated as a business combination from an accounting perspective. We're still reviewing the accounting for the acquisition and we expect to have this work completed in the next few weeks. We will determine the amortization period of the Lazanda product rights in accordance with the applicable guidance under U.S. GAAP, and this amortization will commence in our Q3 results as we close the acquisition in the first month of Q3. We currently anticipate that the amortization of the purchase price will be the range of $100,000 to $200,000 per quarter, but the actual amount will depend upon final determination of the accounting for the transaction and the life of the applicable debts [ph]. As Jim mentioned, we expect Lazanda to make a modest contribution to revenues during 2013, with revenues growing in 2014 and beyond.

In light of the use of cash to acquire Lazanda and the expected Lazanda revenues and expenses through the end of the year, we are updating and reiterating our 2013 guidance. We expect 2013 revenues of $125 million to $135 million. This includes expected revenues of $5 million in Q3 upon acceptance of the FDA of the Mallinckrodt NDA on MNK-795, which we announced earlier today and the expected Lazanda revenues. We expect the incremental sales, marketing, clinical, regulatory and other expenses related to Lazanda in 2013 to fall within our previously stated expense guidance of $120 million to $130 million. This includes $4 million of amortization of the Zipsor product rights, plus the amortization of Lazanda product rights and the expenses related to Lazanda.

We expect year-end cash of $70 million to $80 million after payment of the Lazanda upfront of $4 million. We still expect to be cash flow positive on an operating basis in the second half of the year. We're pleased that we're able to acquire an additional, valuable marketed pain product and to absorb the upfront acquisition costs and the operating expenses over the remainder of the year associated with Lazanda within our original expense and cash guidance for the year.

I'll now turn the call to Jim Schoeneck for concluding remarks.

James A. Schoeneck

Thanks, Augie. So to summarize, we're very pleased to complete our second product acquisition in just over 1 year. Acquisition and in-licensing of a complementary product is a key element of our strategy. As with our Zipsor acquisition, we believe that our acquisition price for Lazanda represents a disciplined approach and good stewardship of our cash and resources. Essentially, we're using the $5 million from the Mallinckrodt milestone we announced this morning and are reinvesting it into the acquisition of Lazanda.

We think Lazanda's an excellent fit for DepoMed. We believe we can grow the revenues and we believe Lazanda can make a meaningful contribution to revenues and cash flow in 2014 and beyond. And we thank the hardworking team at Depomed for both driving this transaction and now directing the transition of Lazanda to DepoMed. I want to add that our team continues to look for additional products for acquisition to augment our pain and CNS franchise.

And now, we'd like to open the call for questions.

Question-and-Answer Session

Operator

[Operator Instructions] And our first question comes from Jason Butler at JMP Securities.

Jason N. Butler - JMP Securities LLC, Research Division

It looks like a good strategic fit and, like you say, it's not an expensive acquisition. Maybe you could just talk about the experience with Lazanda and the market in the U.S. so far. Why it hasn't really gained substantial market traction and what you think you can do to improve that market positioning?

James A. Schoeneck

Jason, this is Jim. I'll start and I'll see if Mike wants to add some things to it. I think there's a couple of things. One, the primary approach by Archimedes to the market was with contract sales reps and going after the oncologists. And while the oncologist is important in this category, the pain specialist actually writes a larger percentage of the category and they tend to write larger scripts in strength and more scripts with a higher strength. And so, one of the things that we've seen is over the last 3 quarters, the sales of the product have gone up pretty dramatically. If you look at the SHA sales for 4Q last year, it was only $416,000; where for second quarter, it was for $1,473,000. And the biggest thing you see differently between those quarters is the pain specialists are now writing about half the drug. So they actually have started to pick up the pain specialist. But we believe with our penetration there, we can even do more with it.

August J. Moretti

As I told -- i'll just add to that. The nasal is an important component particularly with the presence of mucositis and the variability in the labels of several of the competitors in the presence of mucositis. So that will be a key advantage out there in the marketplace with the pain specialist.

Jason N. Butler - JMP Securities LLC, Research Division

Great. And then just -- can you talk about the experience in Europe on whether the market dynamics have been different there?

James A. Schoeneck

I don't know the exact country-by-country piece. Jack, I don't know if you remember any of it.

Jack Anders

I do not.

James A. Schoeneck

They've done better in Europe than they've done in the U.S., I just -- Jason, I can't give you the exact numbers on it.

Jason N. Butler - JMP Securities LLC, Research Division

Sure. And then just broadly speaking, can you talk about the market for transmucosal fentanyl products, do you think that we've now seen a stabilization of this market? Is this a market that you think can be grown as potential for label expansion here? Just general thoughts on this market.

James A. Schoeneck

I think once the TIRF REMS came in, and you certainly saw the market contract, but as we look over the last 2 quarters, it indeed looks like that has stabilized. And I think that really is where the opportunity is for us. You've seen that stabilization. You've got quite a bit out there in generic use. You've got some differentiated products that have come on to the market in the last couple of years. And so I think the branded category and the opportunity to expand. I'm not sure the overall fentanyl piece would expand, but certainly I think branded will.

Operator

[Operator Instructions] And our next question comes from Jason Napodano with Zacks.

Jason Napodano - Zacks Investment Research Inc.

Curious as to whether or not you will also assume the 14 sales reps that are out there from Archimedes now promoting the product.

James A. Schoeneck

I mean, at this point, Jason, we're going to make the evaluation on things, and we will bring -- we will have a direct DepoMed sales force and it's rather than through a contract. So we'll do it directly from us to the marketplace, and we'll really be figuring out over the next few days exactly what we want to do with the current 14 folks.

Jason Napodano - Zacks Investment Research Inc.

Okay, so this is not going to be kind of plugged into your existing sales force behind -- I know it's a different market, but I'm -- there's got to be some overlap with pain specialists behind Gralise and Zipsor.

James A. Schoeneck

Yes, certainly there's an overlap. And at this point, just for competitive reasons, we're getting into a discussion around exactly how we're going to deploy.

Operator

[Operator Instructions ] Our next question comes from Joy Marshall at Cenvest.

Joy Mishaw

I wanted to ask regarding the SHA sales numbers, you mentioned those were gross. Any kind of gross to net you can put on that, just to give us an idea what the net would be?

James A. Schoeneck

Joy, those were actually more of a modified number rather than true gross. So, Jack, you just want to talk to what those numbers are.

Jack Anders

Sure. SHA is based on the prescription. It's estimating the dollars that Archimedes was selling to wholesalers at the current whack. In terms of -- from a gross-to-net perspective, we're not quite ready to disclose any type of number around that, but it's going to be nothing out of the ordinary with what you've seen with our existing products.

Joy Mishaw

All right. And then are there currently generic transmucosal fentanyl products out there like a backseat generic or things like that?

Michael Sweeney

Yes, there's one generic and it's an oral generic, which I think is an active generic. But the majority of the market and the growth in the market is being driven by alternative means of administration.

Joy Mishaw

Okay. And then the REMS, how does that factor into your DepoMed? Your current products don't currently have REMS, and what kind of additional capabilities will you need to implement that?

Michael Sweeney

In preparation for this, we've had a number of safety modifications and training. And we are fully able to manage the safety and the REMs around Lazanda.

James A. Schoeneck

It also certainly really focuses the target audience since the physicians have to be enrolled. And so when you look at this market, there's only about 5,000 prescribers in the branded side of the market and about 1,800 of them make up 90% of the volume. So it's a really focused market.

Joy Mishaw

Okay. So you said 5,000 subscribers are enrolled?

James A. Schoeneck

Are enrolled in the TIRF REMS and then you've got 1,800 that are -- that make up 90% of the branded market prescription.

Joy Mishaw

Okay. And so do you think -- for you, is the growth going to come out outside of those -- more doctors or calling from that, kind of than 5,000.

James A. Schoeneck

No. I think initially, we'll focus on the relationships that we have with pain specialists. I think that really is our advantage of coming in compared to where Archimedes was focused more on the oncology side.

Joy Mishaw

Okay, and then -- I don't know if you can say this, but you know what percentage of, let's say, the pain specialists that you go after currently with your current -- with the store-end release, which one of those are involved in the REMS?

James A. Schoeneck

Honestly, there's a high overlap with the REMS pain specialists to those that we call on. And just the raw numbers of it, we've got -- we call on a lot more pain specialists that are enrolled in the TIRF REMS. But with this, we do have very good overlap with the pain specialists that are enrolled in the program.

Joy Mishaw

Great. Okay. And then one last question, just I missed this number. You said IP protection, I think later year is 2024, but what was the earlier -- the expirations of the patents?

James A. Schoeneck

2018 is the first batch, Joy, and October of '24 is the second.

Operator

[Operator Instructions] And your next question comes from Jim Molloy at Janney.

Unknown Analyst

This is actually Cara [ph] on for Jim. I just had a couple of quick questions. The first one is when was last price increase for Lazanda that Archimedes did? Do you happen to know that?

Abe Wischnia

This is Abe. I believe, Cara, that they have not taken one since the launch.

Unknown Analyst

None since the launch. Okay. And are you guys anticipating a similar type of 20% price increase that you did like for Zipsor?

Abe Wischnia

This is one where certainly on promoting [ph] the product over today, we have not taken a price increase. But in terms of things like that, those are -- not anything that we would have preannounced if we were going to do it.

Unknown Analyst

Okay. And you said that the current trends or Rx trends are -- have been positive over the past 12 months?

James A. Schoeneck

Yes, the last 3 quarters in particular, it's gone from around of $400,000 of SHA sales in 4th quarter last year to $900,000 in the 1st quarter to almost $1.5 million in the second quarter. There's been some good growth over the last 3 quarters and a lot of that's driven by the pain specialists.

Thank you very much. So I want to thank everybody for joining us on short notice today. I'm sure there'll be some questions. As you continue to look at this and do your analysis. And as always, we look forward to continued interaction and to our earnings call next week. So thank you all.

Operator

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

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