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Depomed, Inc. (NASDAQ:DEPO)

Q1 2010 Earnings Call Transcript

April 29, 2010 5:00 pm ET

Executives

Matt Gosling – IR

Carl Pelzel – President & CEO

Mike Sweeney – VP, R&D

Tammy Cameron – VP, Finance

Analysts

Scott Henry – Roth Capital Partners

Jim Molloy – Caris & Company

Operator

Good day, and welcome to the Depomed first quarter 2010 financial results conference call. Today's conference is being recorded.

At this time, I'd 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 of Depomed; Tammy Cameron, our Vice President, Finance; and Dr. Mike Sweeney, our Vice President, Research and Development.

At the close of market today, we issued our financial results for the first quarter ended March 31, 2010. They are available on 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.

I will now turn the call over to Carl Pelzel.

Carl Pelzel

Thank you, Matt. Good afternoon and thank you for joining us on the call. I am pleased to report that we have made significant progress in moving our high-value, late-stage programs forward, in controlling costs and progressing business development deals. Since last fall we have significantly reduced Depomed's investment risk profile by generating positive data in our DM-1796 program in PHN, completing and filing the NDA for DM-1796, defining our path forward with the FDA on our Serada program, and maintaining a significant cash balance.

The filing of the NDA for DM-1796 was an extraordinary accomplishment for Depomed. We are currently very engaged in manufacturing activities to build inventories of commercial material in support of the launch of DM-1796 in 2011. The market that this product will compete in is growing fast, and it is defined by just two products that appear to have an inferior commercial profile – generic gabapentin and Pfizer's LYRICA. Both products contribute to a market that generates over 35 million prescriptions per year, with profiles that expose patients to significant CNS side effects and the need to take numerous doses per day.

While LYRICA prescriptions are actually falling, the generic market is growing strongly, having grown by over $800 million in value at branded prices over just the past two years. We think this is a real indication that LYRICA has not been able to deliver a compelling product profile to physicians and managed care payers. We anticipate that physicians and patients will recognize the multiple benefits from DM-1796. Achieving even a 15% share of this market could result in sales of at least $1 billion at peak.

Our Phase 3 trial of Serada for menopausal hot flashes, called Breeze 3, is set to begin. We're awaiting confirmation from the FDA that our special protocol assessment has been agreed. We anticipate receiving that notification as soon as tomorrow. Assuming there are no changes to our protocol, we will proceed with the randomization of the first patient.

For reasons Mike Sweeney will explain in greater detail, we believe Breeze 3 will accurately measure Serada's excellent drug effect at one, three and six months, and that the placebo effect will be in line with that seen in other published hot flash trials. We anticipate that the trial will complete by the end of the first quarter of 2011 and we will be in a position to announce the results in the second quarter.

Serada's commercial prospects are excellent. We anticipate launching the first and only non-hormonal product for the treatment of hot flashes in 2012. The unmet need is acute and experienced by millions of patients who either cannot take hormones for their hot flashes or choose not to.

There are approximately 13 million women who seek medical attention for the management of their hot flashes every single year. Serada would reach $2 billion in sales if only 20% of them were to use Serada, assuming pricing consistent with antidepressants and 220 days of uses per year.

Now, while no specific mix of sales and marketing costs and activities have been determined at this point, and partnering decisions remain to be made, I make the point only to highlight the very significant opportunity that exists for Depomed and a primary care partner in this attractive commercial area. While we expect to achieve profitability before the launch of Serada in 2012, it will be the success of this product that has the potential to deliver the strong, consistent growth necessary to propel Depomed from a development story to an earnings and EPS story.

In addition to Serada, we have been very careful to establish a franchise of products that, once approved, can be promoted to women's health doctors. We would like to avoid the trap that many emerging companies fall into, that of having the cost of a sales and marketing effort supported by only one asset, no matter how attractive that asset may appear.

For example, in our deal with Covidien we have gained exclusive rights to the two opioid-acetaminophen combination products that we have formulated with our Accuform technology. The opioid market in the US is very large, with $6 billion in annual sales.

The products Covidien is developing could provide clinically relevant patient benefits in that market, including simpler to use, dosing convenience and nighttime coverage of pain. Those benefits would address major medical needs in the current treatment of moderate pain.

OB/GYNs currently prescribe 6 million opioid prescriptions per year. If we were to capture 15% of that OB/GYN market only, we could generate over $100 million per year over and above the sales of Serada.

Now, these numbers are illustrative and not tied yet to firm development timelines or selling expenses. But they are intended to help frame the magnitude of the opportunity that the products represent.

Moving now to our financial performance, I'm very pleased that we have grown revenue, kept expenses down and maintained a strong balance sheet. Glumetza product sales reached 12.5 million in the quarter, compared with 6.6 million for the first quarter of 2009, with an all-time high of 29,000 prescriptions in March.

Meanwhile, our operating expenses are down somewhat from year ago, and we have 71.5 million in cash and marketable securities, with a further 10 million from Abbott Products anticipated late this quarter or early next quarter. I'm particularly pleased that we are able to narrow our SG&A expense guidance downward due to careful expense oversight and management.

Regarding Glumetza, we were, of course, disappointed by the news that our Glumetza commercialization partner, Santarus, did not prevail in the generic challenge to its lead product, Zegerid. However, we're confident in the Santarus organization's commitment to grow Glumetza sales, particularly as those sales may become a more significant contributor to Santarus' revenue and profitability.

We remain very much on track to achieve the corporate objective that drives all of our activities here at Depomed, reaching profitability in 2011 and beyond from growing product and royalty revenue.

Now I'd like to ask Dr. Mike Sweeney to discuss Breeze 3. Mike?

Mike Sweeney

Thank you, Carl. For 2010, our major clinical goal is to advance Breeze 3, our Phase 3 trial evaluating Serada for menopausal hot flashes, towards completion as soon as possible. As a reminder, Breeze 3 will be a 600-patient, six-month, randomized, double-blind, placebo-controlled study evaluating an 1800-mg daily divided dose of Serada against placebo.

We are prepared to initiate the study as soon as we receive FDA's input to our revised Breeze 3 trial under FDA's special protocol assessment procedures. As Carl mentioned, this should occur very soon. Our sites are all online, and interest in the study has been substantial, with more than 200 patients in the screening process already.

We believe Serada effectively reduces hot flashes. We expect Breeze 3 will be successful if the recorded placebo response is in the range observed in other published trials. That would require an increase of approximately one hot flash per day in the average frequency of hot flashes within the placebo group relative to Breeze 1, our prior six-month study.

We expect Breeze 3 to succeed for a number of reasons. Breeze 3 incorporates requirements designed to minimize the impact outliers have on the study and appropriately manage placebo response.

First and foremost, we have minimized the impact outliers can have on Breeze 3 by adopting a non-parametric statistic analysis, with FDA's approval. It bears repeating that the eight co-primary endpoints in the 1800-mg arms in Breeze 1 and 2 were achieved five out of eight times at the required 0.025 statistical P value in the first studies.

By eliminating one active arm, the required P value increases to 0.5 – sorry, 0.05 and we would have achieved six out of eight endpoints on this basis. Applying Breeze 3's statistical modification, we would have achieved seven out of the eight endpoints to a P value of less than 0.02, and the eighth endpoint would have narrowly missed.

We have previously discussed the other measures that we have implemented to mitigate against an unusually high placebo effect. We have reduced the number of active arms to one, so it's just a two-arm study. We have doubled the length of the run-in period from one week to two. We have significantly reduced patient interaction with clinical centers.

And during the last 12 weeks of the trial, patients will record hot flashes only one week out of every four, to reduce boredom and mechanical data entry, or diary entry. We expect these refinements will result in a placebo effect of between 45% and 55%, as seen in the other published hot flash trials. If that occurs, we are confident Breeze 3 will succeed.

As we advance our Serada clinical program, our IP estates around Serada continues to improve. We have secured an extension of nearly two years to the term of one of our patents covering gastric-retentive gabapentin formulations out to 2025. Similar extensions are possible for our other gabapentin patents.

We also continue to advance our early-stage pipeline. We will be initiating a follow-on Phase 1 study of DM-1992 in Parkinson's patients later this year, and we expect to report results early next year.

Carl Pelzel

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

Tammy Cameron

Thank you, Carl. Revenue for the three months ended March 31, 2010 was $15.4 million, compared to $9.9 million for the three months ended March 31, 2009. The increase was driven by a $5.8 million increase in Glumetza product sales. The increase in product sales year over year was due to increased shipments, a shift in product mix to the 1000-milligram formulation, price increases and improvements in our gross-to-net due to a reduction in discounts to managed care organizations. Product sales in Q1 2010 as compared to Q4 2009 increased 2.6 million as a result of improvements in our gross-to-net and price increases.

Operating expenses for the three months ended March 31, 2010 were 17.6 million, compared to 19 million for the three months ended March 31, 2009. The decrease in operating expenses was primarily attributable to a $4.8 million decrease in research and development expenses due to the completion of our Phase 3 program for DM-1796 and completion of our Breeze 1 and Breeze 2 Phase 3 programs for Serada.

In addition, SG&A expenses decreased by 900,000, mainly due to lower headcount. The decreases in R&D and SG&A are partially offset by a $4.3 million increase in promotion fee expense to Santarus under our promotion agreement due to the increase in Glumetza product sales.

Stock-based compensation expense was 500,000 for the three months ended March 31, 2010, as compared to 700,000 for the three months ended March 31, 2009. Net loss for the three months ended March 31, 2010, was 3.8 million, or $0.07 per share, compared to a net loss of 10.2 million, or $0.20 per share, for the three months ended March 31, 2009.

Cash, cash equivalents and marketable securities were 71.5 million as of March 31, 2010, compared to 81.8 million as of December 31, 2009.

In regards to our 2010 financial guidance, as previously stated we expect R&D expenses for the year to be in the range of 24 to $27 million, which includes approximately 9 million in external costs for the Breeze 3 study for Serada.

We expect SG&A expenses to be in the range of 16 to 18 million, excluding any promotion fees paid to Santarus, which run through our income statement as a selling expense. So we expect our total 2010 R&D and SG&A expenses to be from 40 to 45 million, compared to 51 million in 2009.

We expect to end 2010 with 50 to 55 million in cash, which will include approximately 2.3 million in debt.

Our guidance does not assume any monetization of non-core assets or any success related to milestones from existing deals other than the 10 million NDA acceptance payment for DM-1796.

We are also expecting milestone payments from Abbott Products of 35 to 60 million as soon as the first quarter of 2011.

Let me turn the call back to Carl to wrap up.

Carl Pelzel

Thank you very much, Tammy. I would just like to thank everyone at Depomed for an excellent quarter and for the significant advancements we made toward our profitability objective.

With that, I'd now like to open the call up for any questions that folks may have. Operator?

Question-and-Answer Session

Operator

Thank you. (Operator instructions) and we'll go to our first question from Scott Henry, with Roth Capital.

Scott Henry – Roth Capital Partners

Thank you, and good afternoon. I guess just starting really quickly on the model, it looked like Glumetza jumped a little bit more than scripts. It looks like about 12.6 million from 10 million last quarter. Certainly scripts didn't increase that much.

Anything unique there, any stocking, any price increases? How should we think about that jump? And, also, it looks like the product's more profitable than it has been. It looks like COGS were only about 11%. Just any thoughts.

Tammy Cameron

Scott, this is Tammy. You're looking Q4 to Q1?

Scott Henry – Roth Capital Partners

Yes.

Tammy Cameron

There was – we had some improvements in our gross-to-net due to changes in some of our managed care contracts, so we'd see some improvements there, and then also due to price increase, as you stated.

Scott Henry – Roth Capital Partners

Okay. But no stocking impact there, or – or is the 12.5 – I guess is the 12.5 million a good go-forward base number is what I'm really asking?

Tammy Cameron

Yes.

Carl Pelzel

Yes, it is.

Scott Henry – Roth Capital Partners

Okay. All right, sounds good. Sounds like things are going well there. Then, I guess just shifting over to the pipeline, for starters, DM-1796, any thoughts on when you may out-license international rights to that product?

Carl Pelzel

You know, it's a sensitive question. I appreciate that you would want to ask it. We're in discussions with global pharma right now and have been for some time, so I really can't give you any guidance as to when that deal might close. We're at BIO next weekend. We'll certainly be meeting with the folks that we've already initiated discussions with at that meeting.

Scott Henry – Roth Capital Partners

Okay. So I guess it's just ongoing –

Carl Pelzel

Yes.

Scott Henry – Roth Capital Partners

Which is fine. Shifting over to Serada, when you get the SPA, do you expect the FDA to clarify whether six months will in fact be a primary endpoint or even a secondary endpoint that they really want you to hit? I mean, how should we think about clarity on that situation?

Carl Pelzel

Yeah, Scott, just let me take that one and I'll ask Mike to expound upon it. The discussions we've had with the FDA have been such that they've indicated it's an important but a secondary endpoint. And the guidance I've given previously was, yes, it's a secondary endpoint, but the FDA really wants to know that the product has a long-term benefit, beyond three months. So we don't expect that to change.

Mike, any thoughts on that?

Mike Sweeney

No, it's just the way it's written in the protocol, Scott, which we have agreed with the FDA, obviously pending any final comments from them on the SPA is that the primary endpoints will be for 12 weeks and the key secondary endpoint will be 24 weeks.

Scott Henry – Roth Capital Partners

So I guess I'm just curious, Mike. The way I interpret that is that you want to do better at six months, but it's probably okay if it's a P value of 0.15 or lower, but it probably isn't okay if it's just a non-event or going in the opposite direction. I mean, is that a fair way to think about it?

Mike Sweeney

I think, as you said, frankly, yes, Scott. We want to do better at six months. It'll make life a lot easier if we do better at six months.

Scott Henry – Roth Capital Partners

Okay. And then, Mike, you mentioned something about changing the trial, something about filling out the record one out of every four weeks, or – could you maybe talk about that and what kind of impact that could have on the trial?

Mike Sweeney

Obviously, six months is a lot to ask patients to keep adding hot flashes into what they experience them. And what we found in the previous study is that patients essentially just stopped doing it. Twenty of them actually stopped doing it completely. They carried on taking the tablets, but they just stopped filling them in.

And, of course, what you don't know is how many patients started missing them. And, of course, missing putting your hot flashes in impacts the placebo to a greater extent, because if you have two hot flashes on an active, you're likely to put them in. If you have four hot flashes on placebo, you may not put all four in. So it's likely to impact the hot flashes on placebo more.

So what we've done this time is say to be fair to the patients and also to keep their interest, we used a more sophisticated system. Hence, we can let the patients stop and then we can text message and call the patients and ask them to start again.

So they have three weeks' rest, and then they start refocused for one week. Then they have another three weeks' rest and then they start again refocus for one week. So they're interested, it's not repetitive anymore, and now we give them three weeks' rest and they fill in the final two weeks. So we think that interest will capture exactly what's happening.

We felt that there was probably a bit missed in the last one, which tended to affect – not capturing hot flashes tends to affect the arms in which you have the most hot flashes. You'll tend to minimize those more. So we're trying to get away from that.

Scott Henry – Roth Capital Partners

Okay, fair enough. And I guess just final question from me, in terms of the GERD programs, the Parkinson's programs, any update on – any value-creating activities we could see kind of over the next six months in those programs, or the Covidien or really any of the other stuff?

Carl Pelzel

Yes. The first two formulations that we developed for Covidien now are going through Covidien's development program, so those will progress to Phase 1 trials and beyond. And there are some milestones that will be triggered along the way. On the GERD program, we are actively out-licensing that program and we have been for a while. But for the Parkinson's program, because we're going to do a second Phase 1 trial in patients in the fall, we're not actively out-licensing that product at this time.

We're going to wait until we get the results. We're in discussions with the folks that expressed a strong interest, but the objective there is not to bring those discussions to a deal at this point, but it's simply to keep them aware of, alert to progress on the formulations and the plans for the trial.

Scott Henry – Roth Capital Partners

Okay, great. Thank you for taking all the questions.

Carl Pelzel

Thanks, Scott.

Operator

(Operator instructions) We'll go next to Jim Molloy, with Caris & Company.

Jim Molloy – Caris & Company

Hey, guys. Thanks for taking my question. It's hard to find anything left to ask after such an insightful analyst before me, but I'll try to figure a couple of questions out here. Maybe on the – just to clarify, again, the SG&A is at 16 to 18, R&D 24 to 27.

Mike Sweeney

That's right.

Jim Molloy – Caris & Company

And then the 50 to 55 million cash at the end of the year guidance that includes the 10 million milestone from Abbott, assuming the NDA gets accepted.

Tammy Cameron

Yes, that is correct, Jim.

Jim Molloy – Caris & Company

Okay, great. Then on – one question on – has there been any additional communication with the FDA sort of on any of the programs that you can share with us? Obviously you're waiting for the SPA on the hot flash drug, and you are waiting for the NDA acceptance on the once-a-day Neurontin. Any further communication from those – from the FDA on that?

Carl Pelzel

Yes, no, not really, Jim, but, to your point, none was anticipated.

Jim Molloy – Caris & Company

Okay.

Carl Pelzel

Yeah.

Jim Molloy – Caris & Company

And I guess, the Parkinson's, obviously no partner on that. How does that, going with another Phase 1, obviously an earlier trial, earlier program, not front burner, but what does that say about the program? Any thoughts on your confidence on sort of some of your other earlier programs maybe getting a partner signed near term?

Carl Pelzel

I'm sorry, you're asking about further context around the Parkinson's program?

Jim Molloy – Caris & Company

Yeah.

Carl Pelzel

Yeah.

Jim Molloy – Caris & Company

And how (inaudible) GERD. I mean, the GERD you're waiting for a partner before you go into Phase 3, and we had been waiting for a partner on the Parkinson's before starting another Phase 2, and now we're back to Phase 1 in that one.

Carl Pelzel

Yes, we are not – with Parkinson's the first trial was a Phase 1 in patients and this next trial is being pursued because we changed the formulations, we tweaked the formulations, pardon me, hoping to achieve a BID profile.

And I think, as Mike indicated on the last call, we also have a finger-tapping test, so even though it's just a one-dose PK trial, we will get some indication as to activity of the compound that's on board. And so we will partner that as soon as we get those data. So we are not going to pursue any trials with Parkinson's beyond the Phase 1 that we already have planned that will start in the fall.

The same, actually, is true of the GERD trial, because the relationship between blood levels of omeprazole, or the PPIs, and the corresponding pH levels in the stomach is so well established. We are going to take the data that we currently have that supports the GERD formulation and license that now, so it will be a partner that has the responsibility for further development of GERD.

Jim Molloy – Caris & Company

And realizing that there's limited things you can say about potential partnerships OUS for the once-a-day gabapentin, would you characterize the conversations at maybe at a waiting point here, waiting for the NDA acceptance or the SPA for the Serada product, perhaps?

Carl Pelzel

No, actually, not at all. While there are some markets where additional trials will be needed, in every market the US trial is pivotal for any kind of a registration activity in any markets outside the US. But partners, having seen the data, are not waiting for acceptance of that NDA filing. They're moving forward. And some of them are moving forward with interest across the board. Others are more selective in sort of just Japan or just greater Asia.

What's interesting is if you look at big pharma over the last year and a half you see a very significant shift in focus away from the US and toward rest of world as a focal point for future revenues. Andrew Witty has expressed this numerous times, indicating that GSK would be looking ex-US and actually non-Rx for a lot of growth, Pfizer the same way.

So I'm not signaling who we're talking to, but I'm simply indicating that across the board there is a very keen degree of interest in looking outside the US, where the healthcare environment is more uncertain, and looking to rest of world for revenue.

So the interest is very strong, and I think that is in part due not just to the US emerging healthcare environment, but to the fact that ex-US economies are strong and the middle class is growing.

And so where previously the only market that existed was a reimbursed market, now there's a very significant middle class that has the potential to buy products on the private market. So the interest is strong.

Jim Molloy – Caris & Company

Well, thank you very much for taking the questions.

Carl Pelzel

Thank you, Jim.

Operator

And at this time, there are no questions in queue.

Carl Pelzel

Great. Well, thank you very much, Operator. With that, I'd like to thank everyone for their attendance and give you a reminder. Actually, the first one is not a reminder, because it's news. We will be presenting at the Deutsche Bank 35th Annual Health Care Conference on Monday, in fact.

And then a reminder that we will also be presenting at the Ninth Annual JMP Securities Research Conference in San Francisco May 10th through the 12th, one of those days, and the Ninth Annual Needham Healthcare Conference in New York City that takes place June 9th through 10th .

So thank you very much for joining us on today's call, and I look forward to seeing and speaking with many of you very soon. Thank you.

Operator

This does conclude today's conference call. We thank you for your participation.

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