DepoMed Management Discusses Q4 2013 Results - Earnings Call Transcript

| About: Depomed Inc. (DEPO)


Q4 2013 Earnings Call

March 12, 2014 4:30 pm ET


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

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

Jack Anders

Matthew M. Gosling - Senior Vice President and General Counsel


Jason N. Butler - JMP Securities LLC, Research Division

John Rousmaniere Gordon - Deltec Asset Management, LLC


Good afternoon, everyone, and welcome to the DepoMed year end financial results conference call. [Operator Instructions] Please also note that today's event is being recorded. At this time, I'd like to turn the conference call over to Mr. August Moretti. Sir, please go ahead.

James A. Schoeneck

Thank you, operator. Good afternoon, and welcome to our Fourth Quarter and Fiscal Year 2013 Financial Results and Business Update Conference Call. With me today are Jim Schoeneck, President and Chief Executive Officer of Depomed; Matt Gosling, Senior Vice President and General Counsel; and Jack Anders, Vice President of Finance.

I'd like to remind you that the matters discussed on this call will contain forward-looking statements that involve risks and uncertainties, including those related to commercialization plans for our marketed products, expectations regarding intellectual property, litigation and corporate development efforts, and our projected revenue and EPS.

Actual results may differ materially from the results predicted and recorded 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 will file with the SEC in the next few days, most particularly under the caption Risk Factors.

Depomed disclaims any obligation to update or revise any forward-looking statements made on this call as a result of new information or future developments. Depomed's policy is to provide financial guidance and guidance on corporate goals for the current fiscal year and to update or confirm its guidance only by issuing a press release or filing updated guidance with the SEC in a publicly accessible document or providing such information on a publicly available Investor Conference Call.

References to current cash, cash equivalents and investments are based upon balances at December 31, 2013. All other guidance, including guidance relating to the company's expected revenues, GAAP EPS, non-GAAP EPS, and year-end cash is as of today, March 12, 2014. I'll now turn the call over to Jim Schoeneck.

James A. Schoeneck

Thank you, Augie, and thank you, all, for joining us today. 2013 was a transformational year for Depomed. When we started the year, we had 2 marketed products for the management of pain, Gralise and Zipsor. And we had a royalty stream facing a patent cliff in 2016 from Glumetza sales in the type 2 diabetes market. Since then, we've added 2 new products in the area of pain and neurology with long-term growth potential. Both are already in the market. Lazanda, which treats breakthrough pain for patients with cancer. And CAMBIA, the only single-agent drug in its class approved for the treatment of acute migraine in the United States.

Importantly, in 2013, we sold our interest and milestones and royalties for our type 2 diabetes portfolio for $240.5 million, positioning us financially to bring on additional products in pain, neurology and adjacent areas. In short, we more than doubled our direct product revenue and tripled our cash position compared to 2012.

Business transactions we executed last year were essential to our transformation. In addition, our commercial achievements in 2013 demonstrated our ability to create value and drive growth on our marketed products. We achieved total product revenues of $58 million, an increase of 112% over 2012. This growth was in part due to our acquisition strategy, but also the execution of our commercial strategy.

We generated 2013 net income before taxes of $4.6 million. Augie will go through the details behind those numbers shortly.

We had prescription growth throughout 2013 for Gralise, generating an increase in year-over-year Gralise sales of 109% between 2012 and 2013. For Zipsor, we refocused our sales force to maximize its growth and reverse the prescription decline that was there when we purchased the product. Zipsor posted over $20 million in net sales and 17% growth in Q4 over the same quarter in 2012.

We relaunched Lazanda in late October with a dedicated sales force and with our new Signature Support Program to improve patient access.

I wanted to give a little bit more detail around our products next. Gralise continues to be our highest revenue product, and we believe that the market opportunity is large and growing. As of year-end 2013, our net sales run rate was more than $50 million, and that was prior to our recent price increase. We continue to focus on managed care, especially Medicare Part D, and we expect the addition of new managed care coverage during this year.

Further strengthening the value of Gralise was the favorable Markman claim construction hearing we received in January 2014 and our litigation against 3 companies that had filed to market generic versions of Gralise. The ruling either adopted our proposed claim construction or affirmed the plain and ordinary meaning of the term in 23 of the 24 disputed terms. We continue to believe that our strong IP protection will provide long-term market exclusivity for Gralise.

As you know, we acquired CAMBIA in late December 2013. We relaunched the drug in only 6 weeks, with full sales force efforts starting in February. When we acquired the product, we increased the price by 26%. We believe that it's the only single-agent drug in its class approved for the treatment of acute migraine, Depomed can grow the sales of CAMBIA significantly. Given the great overlap CAMBIA has with Gralise, many of our physicians who write CAMBIA also write Gralise prescriptions. And a very limited nature of the overlap with Zipsor, CAMBIA represents an outstanding opportunity to grow our business in the neurology community.

Zipsor continues to be an important product for Depomed, as it extends our franchise in pain specialists. In 2013, we were able to resume its growth. As of December 2013, our net sales run rate is over $25 million.

We acquired Lazanda in July 2013 and relaunched the drug in late October with our new Signature Support Program, designed to improve patient access. Elements of the program include benefit verifications and prior authorization facilitation, reimbursement assistance with co-pay support, coverage of the initial drug supply until reimbursement is approved, a 1-800 reimbursement support hotline and prescription reminders. We believe that these elements, along with our team of dedicated sales specialists, will be instrumental to continuing the growth of Lazanda. While the launch of the program has not yet had a significant impact on demand, we anticipate that we will see that effect later this year.

A review of our business would not be complete without looking at the partnering and licensing activities driven by our Acuform technology. Two near-term programs provide upside to our revenue and with the potential of milestones and royalties. Today, Mallinckrodt announced that the FDA-approved the XARTEMIS XR, oxycodone hydrochloride and acetaminophen extended-release tablets, for the management of acute pain, severe enough to require opioid treatment, and in patients for whom alternative treatment options are ineffective, not tolerated, or would otherwise be inadequate. XARTEMIS XR utilizes Depomed's Acuform delivery technology and the approval triggers a $10 million milestone that Depomed will recognize as revenue in Q1 2014. We will also receive high single digit royalties on the future sales of XARTEMIS XR for a period of at least 15 years.

Mallinckrodt has stated that they expect to file for approval our second partnership product, MNK-155, in the second half of their 2014 fiscal year, which ends September 2014. Acceptance of the NDA and eventual approval of the product, earned $15 million in milestone payments for Depomed.

We also expect that Ironwood will initiate a Phase II trial of IW-3718, which utilizes our Acuform technology for refractory GERD during the second quarter, generating a milestone payment for Depomed.

Our business development and strategy team are as busy as ever, scouring the landscape for acquisition opportunities that fit our profile. We continue to look for marketed products in late stage opportunities that are past clinical risk. Our fields remain Pain and Central Nervous System, plus adjacencies. And with approximately $0.25 billion in cash and no debt on our balance sheet, we believe that we have the firepower to execute significant transactions. I'll now hand the call over to Augie Moretti, our CFO, to walk you through our financials and related items.

August J. Moretti

Thank you, Jim. There are 3 areas I'll cover today. First, I'll review the accounting treatment of our PDL royalty sale transaction, and then I'll review our fourth quarter and full year results for 2013. And finally, I'll provide our guidance for 2014, including our future use of non-GAAP reporting. So let's start with the PDL transaction.

To understand our fourth quarter and full year financials, it's important to understand the accounting treatment of our PDL transaction. To remind everyone, in October 2013, Depomed sold certain interests and future royalty and milestone payments in the type 2 diabetes therapeutic area to PDL for $240.5 million in cash. The underlying agreements that gave rise to the future royalties and milestones are complex licensed agreements. And as a result of Depomed's continuing supply obligations with respect to the underlying agreements, Depomed is accounting for this transaction under the debt accounting method. Debt accounting requires us to initially record the proceeds of $240.5 million as a liability on our balance sheet and to impute an ongoing noncash interest charge against the amount of the liability that is deemed to be unpaid.

Although we do not keep the cash proceeds of the royalty and milestone payments sold to PDL, debt accounting requires us to continue to recognize these underlying amounts as revenue on our income statement. As these royalties and milestone payments are received by PDL, the related liability on our balance sheet is reduced, and a noncash implied interest expense is recognized.

During the fourth quarter of 2013, we recognized $18.1 million of noncash revenues and $4.5 million of noncash interest expense related to this arrangement. And we reduced the amount of the liability by approximately $13.5 million. We recognize that this accounting may not be intuitively obvious, given the fact that we don't owe any money or interest to PDL, and that we no longer regain the cash proceeds from the royalties and milestones. However, we worked very closely with our auditors and consulted with the Office of the Chief Accountant of the SEC to come to this accounting conclusion.

To assist investors and other readers of our financial statements, we have identified the noncash revenues and the noncash interest expense as individual line items on the face of our income statement. We've identified the related liability as a line item on the face of our balance sheet.

We are also introducing non-GAAP guidance for 2014, which I will discuss in a few minutes, that excludes the noncash effects of debt accounting.

With that as background, I'll move on to discuss our financial results for 2013 and Q4 2013. Total revenues for the year ended December 31, 2013, increased to $134.2 million from $90.8 million for the year ended December 31, 2012. 2013 revenues reflect a full year of Zipsor sales, approximately 5 months of Lazanda sales, and approximately 2 weeks of CAMBIA sales.

Total revenues for the fourth quarter of 2013 increased to $40.6 million from $26.6 million for the fourth quarter of 2012. We demonstrated strong product revenue growth for Gralise and Zipsor. Gralise revenues in Q4 2013 were $11.7 million, an increase of 55% over Q4 2012 sales of $7.6 million. And keep in mind that Q4 2012 included $1.6 million in one-time increase as a result of the change in our revenue recognition policy to a sell-in basis.

Zipsor revenues in Q4 2013 were $5.7 million, an increase of 17% from $4.9 million in Q4 2012.

With respect to expenses, selling, general and administrative expense was $105.2 million for the year ended December 31, 2013, as compared to $97.6 million for the year ended December 31, 2012. Selling, general and administrative expense was $27.5 million for the fourth quarter of 2013 as compared to $24 million for the fourth quarter of 2012. The increases in 2013 are primarily due to increased sales and marketing expenses associated with product acquisitions of Zipsor in late June 2012, Lazanda in late July 2013 and CAMBIA in mid-December 2013. Also, SG&A for fourth quarter 2013 includes various legal and accounting fees related to transactions.

Research and development expense was $8.1 million for the year ended December 31, 2013, as compared to $15.5 million for the year ended December 31, 2012. R&D expense was $2 million for the fourth quarter of 2013 as compared to $3.2 million for the fourth quarter of 2012. The decreases in 2013 are primarily related to ceasing all SEFELSA expenditures during the first quarter of 2013.

Net income for the year ended December 31, 2013, was $43.3 million, or $0.75 per share, compared to a net loss of $29.8 million, or $0.53 per share, for the year ended December 31, 2012.

Net income for the fourth quarter 2013 was $41.8 million, or $0.72 a share, compared to a net loss of $3.7 million, or $0.07 per share, for the fourth quarter of 2012. Net income for the quarter and year ended December 31, 2013, included an income tax benefit of approximately $39 million related to the reversal of the valuation allowance on our deferred tax asset. Our deferred tax assets are primarily comprised of timing differences between when certain items are recorded for book versus tax purposes. Since the company's inception, these deferred tax assets had been fully reserved due to the uncertainty associated with our ability to fully realize their benefit.

During the fourth quarter of 2013, we concluded that it was more likely than not that these deferred tax assets would be realized. This determination was made based on an assessment of the relative impact of all positive and negative evidence that existed at December 31, 2013, including an evaluation of cumulative income in recent years, future sources of taxable income and the significant risks and uncertainties related to our business.

Cash and marketable securities were $276 million as of December 31, 2013, as compared to $77.9 million as of December 31, 2012. As a result of the PDL transaction and receipt of $240.5 million in proceeds in 2013, we expect to pay approximately $59 million in taxes in the first quarter of 2014 related to fiscal year 2013, so this will reduce cash accordingly.

Now I'll move onto 2014 guidance. Depomed is introducing its financial outlook for the full year of 2014 as follows: product revenues of approximately $115 million to $125 million; total revenues of approximately $200 million to $215 million, which includes noncash revenues related to the PDL transaction and $15 million of potential milestones from Mallinckrodt; GAAP EPS of approximately $0.21 to $0.36, which includes both the noncash PDL revenues and noncash PDL interest expense that we discussed earlier under -- when we talked about the debt accounting methodology; non-GAAP adjusted EPS of breakeven to $0.16 a share; cash flow of at least breakeven, excluding the payment of approximately $59 million in taxes related to 2013, which I discussed a moment ago.

The total products sales guidance for the year takes into account our management estimates of year-to-date product sales. Pharmaceutical sales industry-wide in Q1 and our product sales in Q1 may be impacted by adverse winter weather in the U.S. particularly in the Sunbelt, and changes in the health care landscape like changes resulting from the Affordable Care Act.

Depomed is using towards 200 -- for 2014 guidance and intends to use in future periods non-GAAP adjusted earnings per share in the presentation of its financial performance. This operating metric is a non-GAAP financial measure that we believe provides supplementary information to investors. The company uses this non-GAAP measure in connection with its own planning and forecasting purposes, and for measuring the company's performance. This non-GAAP financial measure should be considered in addition to, and not a substitute for or superior to, financial measures calculated in accordance with GAAP.

With respect to our 2014 guidance, we have included in today's press release a table that reconciles the company's non-GAAP adjusted earnings per share guidance to GAAP earnings per share guidance for the year ending December 31, 2014. Non-GAAP adjusted earnings per share guidance for the year ending December 31, 2014, is not based on any standardized methodology prescribed by GAAP and represents GAAP earnings per share adjusted to exclude noncash revenue and cost related to the sale of future proceeds to PDL. Noncash interest expense on liability resulting from the debt accounting treatment related to the sale of future proceeds to PDL, the amortization related to product acquisitions, and stock-based compensation expense and to adjust the income tax provision to reflect the estimated amounts payable in cash.

Non-GAAP financial measures used by the company may be calculated differently from, and therefore, may not be comparable to, non-GAAP measures used by other companies. I'll now turn the call back over to Jim for closing remarks.

James A. Schoeneck

Thanks, Augie. As we stand back and look at where we are today, we have clearly established Depomed as a leading specialty pharmaceutical company in pain and neurology. We have 4 proprietary marketed products with long-term, high-growth potential. We have a track record of creating value from our product acquisitions. We have approximately $0.25 billion in cash to acquire new products to further fuel that growth, and our Acuform IP and formulation expertise provides us upside as an attractive partnering technology. 2013 was a great year for Depomed and we look forward to updating you on what we expect to be an even better 2014.

Operator, we will now open the call to questions.

Question-and-Answer Session


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

Jason N. Butler - JMP Securities LLC, Research Division

Maybe starting with the product sales guidance. Can you give us any more color there on the contribution of the different products and, maybe, specifically, Gralise to that guidance?

August J. Moretti

Jason, our policy has been to give aggregate product revenue guidance and not to break it down product by product.

James A. Schoeneck

Jason, one thing I would add is that, at the end of last year, we were at approximately $50 million run rate base on demand. And as I think you're aware, we took a 19% price increase the end of February. So that should at least give you some idea where we're coming into the year.

Jason N. Butler - JMP Securities LLC, Research Division

Sure. And then for CAMBIA. When you guys acquired Zipsor, there was a transition period and you mentioned before a period of negative growth following -- during the acquisition. Do you expect something similar at CAMBIA or could there - is there any reason to believe the transition would be different?

James A. Schoeneck

The thing that I would expect to be different is that Zipsor was actually on a pretty steep decline when we acquired it. So it was -- the first job was to stem the decline and flatten that, and then to begin growth. With CAMBIA, it's a bit different. CAMBIA had already been growing in terms of the prescriptions. So if anything, during the transition, I might expect a bit of a flattening and then a resumption of growth.

Jason N. Butler - JMP Securities LLC, Research Division

Okay. In terms of both cash and noncash tax payments in 2014, other than the payment for the 50-month $9 million payment for 1Q, do you expect to be paying tax in 2014?

Jack Anders

Jason, this is Jack Anders. If there were any taxes, it will be minimal amounts. There may be some noncash tax expense running through our financials and we've disclosed what those are in the reconciliation in our non-GAAP to GAAP reconciliation. So I wouldn't expect there to be much in terms of actual cash payment.

Jason N. Butler - JMP Securities LLC, Research Division

Okay, great. And then, just last question and I'll jump back in the queue. Any update on either the Orphan Drug exclusivity debate with the FDA, or any idea or expectations for timing of the ANDA litigation for Gralise?

Matthew M. Gosling

Yes, Jason, it's Matt Gosling. As for the suit with the FDA, it's hard to speculate at this point. We don't -- honestly don't know why we haven't seen a decision yet. It certainly could come at any time. Though, we're no longer speculating as to when we'll see that. I will say, and as Jim mentioned, we're confident we'll get a long period of market exclusivity for Gralise. The trial has been scheduled for -- beginning May 12. So one, and two, the 30-month stay after, the first filer expires in mid-July. So we would expect a resolution certainly sometime before mid-July.


[Operator Instructions] Your next question comes from John Gordon from Deltec Asset Management.

John Rousmaniere Gordon - Deltec Asset Management, LLC

Jim and Augie, I have a couple of questions just sort of bouncing around, the first is, on the $58 million of tax payments, since you're basically going to be recognizing revenue, obviously, on a noncash basis, over an extended period of time, is -- was the $59 million -- is that cash is going to out the door that will represent the full payment with respect to PDL or was it a present value? Because, in fact, you're not actually going to be paying it out all at once? What's the correlation on the timing basis between your extended release, no pun intended, revenue recognition and the payment of taxes?

Jack Anders

John, this is Jack here again. With regards to the $59 million in tax that we expect to pay, in 2013, we -- from a tax perspective, we had to recognize that full $240 million as income from a tax perspective. We did utilize NOLs from the federal perspective to offset some of that gain from a tax perspective and that $59 million represents the full amount of the PDL recognition.

James A. Schoeneck

So John, maybe said another way, the tax piece was immediately released and the GAAP recognition is extended-release.

John Rousmaniere Gordon - Deltec Asset Management, LLC

Okay, very good. Okay, now just moving on to a couple of things that are sort of topical. Literally today, Purdue Pharma issued a press release talking about making a filing of camper-resistant competitor, Zogenix, and its powerful pain pill. And no reason you would have necessarily even seen it, let alone have looked at the composition of their own particular therapy. But it's a nice segue into asking how things are going with Purdue and OxyContin, and I don't know whether, in fact, just your smell test would say that this latest sort of potential infringement by Purdue sounds comparable to the earlier one or not?

James A. Schoeneck

John, we certainly did see it, and I'll turn it over to Matt for the answer.

Matthew M. Gosling

Yes, as far as how the case is going, it's moving a long time. And that we just -- we remain confident that we have a good case there. And hope for a good resolution at some point. It's hard to predict when that resolution may come. As far as we certainly did also see the news from today, and we will certainly kind of take a look with interest at that product when it's available.

John Rousmaniere Gordon - Deltec Asset Management, LLC

Does it look like it might be in a somewhat contiguous zip code to the prior potential infringement or it could be something completely different?

James A. Schoeneck

Yes, John. At this point, I don't think we'd want to speculate. It's one where and we take this very seriously and we would do the requisite lab testing on it to see if indeed we believe there were factors there that caused our IP to read on it.

John Rousmaniere Gordon - Deltec Asset Management, LLC

Right. Okay. And then, Jim, I happened to see last week that there was a company called Insys, that I guess has that therapy that is at least somewhat comparable to Lazanda in terms of being a cancer pain therapy. But I guess it's administered under the tongue as opposed to being a nasal spray in the nose. Could you or somebody just comment on pricing of the 2, and relative efficacy and things like that?

James A. Schoeneck

All of the drugs in this class for breakthrough cancer pain now that you spent, which is used in both of the products, both Insys product and our product are titrated by the physicians to get effective pain relief. So there's not a single dose of the drug. It can be anywhere from 100 micrograms a drug up to 1600 micrograms for some of the drugs. On a price basis, we are priced approximately at the same microgram per microgram level. There is some data out there that shows that our product may be -- may require lower doses to be able to get equivalent pain relief. So on a pure microgram per microgram, we're equivalent in price. And in terms of an effective dose, we may actually be less expensive.

John Rousmaniere Gordon - Deltec Asset Management, LLC

Okay. And then just a couple of other quickies. First, with respect to XARTEMIS that was approved. I have heard that it did not get the hope for labeling as it related to, I guess, tamper-resistance. And I'm just wondering what your understanding is of choreography with the FDA as to whether that's a "well, you had your chance and you didn't get it," or whether there's reasonable prospects for ongoing dialogue that might get a change in the label after it's on the market?

James A. Schoeneck

Yes, I mean, definitely a better question for Mallinckrodt then for us. But I think in terms of what they even said today, they said that they would keep an ongoing dialogue with the agency and look at what needed to be done to be able to get those claims on the abuse resistance.

John Rousmaniere Gordon - Deltec Asset Management, LLC

And then just one last catch basin question. I mean, you've been doing a tremendous amount over the course of the last 6 months and so, I could see why you might want a nice, healthy period of digestion. But at the same time, you do still have a lot of cash on the balance sheet even after sharing some with Uncle Sam. And just curious as to what the level of fever pitch is with respect to looking at other potential acquisition opportunities?

James A. Schoeneck

I think I'm going to take it directly with what I said out of the script that the business development team and strategy group are as busy as ever. I mean, they are still coming to us going, "Okay, Boss, help us prioritize, we still have a lot going on."


[Operator Instructions] And at this time, I'm showing no additional questions. I'd like to turn the conference call back over to management for any closing remarks.

James A. Schoeneck

So, all, I want to thank you for taking the time today to be on the call. Thank you for the support, both over the last few months, and for some of you, much longer than that. And we look forward to being able to share, hopefully, great results over our next few calls and at the conferences over the upcoming year. Thank you again.


Ladies and gentlemen, that does conclude today's conference call. We do thank you for attending. You may now disconnect your telephone lines.

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