Depomed: Long-Term Winner Holding Strong

|
 |  Includes: ABT, DEPO, JNJ, MDT, MRK
by: M. E. Garza

By Patrick Crutcher

Shares of Depomed Inc.(NASDAQ: DEPO) have steadily climbed up more than 20% over the past month. We continue to believe that DEPO is one of the strongest biotechnology companies for their marketcap and that shares have considerable upside over the next 4-6 months.

Not too many biotechs under $250M in market cap have partnerships with Merck (NYSE:MRK), Abbott Labs (NYSE:ABT), Covidien (COV) and Johnson & Johnson (NYSE:JNJ). DEPO is well-positioned to be a multi-billion dollar company within 1-2 years.

Their continued success relies on their business approach and Acuform technology. The strategy thus far has been to use their patented and propreitary Acuform technology to modify existing drugs already approved by the FDA. Their Acuform technology allows for targeted, controlled delivery with meaningful benefits, including greater treatment efficacy, increased treatment tolerability and convenient-dosing.

They typically utilize the 505(b)(2) NDA, which means DEPO products take on less regulatory risk, spend less cash on their trials, and have presumably higher approval chances with the FDA. Acuform is used in the formulation of DEPO’s two FDA-approved drugs, Glumetza® (metformin HCl extended release tablets) and Proquin® XR (ciprofloxacin hydrochloride).

With that said, we want to highlight some of the events that should help propel DEPO even further. First, we hope to hear positive news about the Glumetza 500mg supply chain with product shipments in mid-to-late 4Q 2010. This will certainly give a boost in terms of earnings and share price.

Second, Merck is expected to file an NDA for Janumet XR by the end of the year for an extended-release version of Janumet. DEPO should get a milestone payment from Merck upon FDA acceptance of the Janumet-XR NDA. They will also get royalties on sales of Janumet-XR once approved. Consider this: Janumet had sales of $650M last year, and when approved, Janumet-XR is expected to occupy most of these sales. Sounds like good money in the bank.

More recently they received 2 separate payments for $500,000 each:

  1. They received their 2nd grant from the Michael J. Fox Foundation under its Clinical Intervention Awards 2010 program for clinical work on an extended-release tablet of levodopa/carbidopaIdeally, this product will help establish constant blood levels of levodopa, reduce dosing frequency and maintain/improve effectiveness in controlling Parkinson's symptoms.
  2. They also received a milestone payment after their first formulation being developed under a licensing agreement with Covidien entered clinical development. This has serious potential to be a lucrative partnership for DEPO.

Everyone should mark this on your calendar: PDUFA action date of January 30, 2011 for DM-1796 (gabapentin). If DM-1796 is approved, a $35M milestone payment from Abbott to DEPO will occur with additional milestones up to $25M depending upon how the label reflects any side effects. DEPO will also receive a royalty of North American sales somewhere between 14-20%. In terms of competition, generic gabapentin and Lyrica have about 30-35M prescriptions yearly, yet they have considerably higher incidence of side-effects and lower efficacy. Investors should remember that DM-1796 showed extremely low incidence of side-effects and better efficacy. DM-1796 should be able to gain a substantial amount of the market.

Additionally, investors should be aware of the fact that DEPO is shopping around a deal for rest-of-world (ROW) rights to DM-1796. Some have stated that DEPO hopes to get around $250-300M for these rights to DM-1796. This would essentially double their current market cap and give them considerable financial resources to push their pipeline along without dilution.

Looking further ahead, we have results from BREEZE-3 for Serada in hot flashes. Back in August, DEPO secured a Special Protocol Assessment for this pivotal trail from the FDA to eventually support approval. Results are expected sometime in Q3-2011. If the results come back positive, DEPO could have a multi-billion dollar drug on their hands with little competition. We will be watching the status of this trial very closely.

Once the Super Bowl of FDA decisions is done, wise investors are going to be looking for a place to put some of those gains. With considerably fewer regulatory decisions currently scheduled in the first part of 2011, DEPO should start to get a little more attention.

The price will really start to move once the analyst upgrades start coming and more realize the opportunity at hand. There are only 52M outstanding, the vast majority (55-60%) are held by institutions. DEPO has no need for dilution or financing considering it has well over $60+ million in the bank with recurring revenues and multiple potential catalysts coming. The future for Depomed looks very bright.

Disclosure: Author is long DEPO