Going Bullish on Depomed

Includes: ABT, DEPO
by: M. E. Garza

By Patrick Crutcher

The recent trading activity in shares of Depomed Inc.(NASDAQ:DEPO) has triggered a trade alert. Institutions and funds have been accumulating shares of DEPO the past few weeks and it appears to be ready for the next leg up. January has fewer FDA decisions, so we expect DEPO to gain a lot of attention as biotech investors look for favorable investment opportunities.
We remain optimistic about Depomed going into their PDUFA date on January 30, 2011 for DM-1796. DM-1796 is an Acuform version of gabapentin, which is an FDA-approved immediate release pharmaceutical for the treatment of partial epilepsy and management of postherpetic neuralgia (PHN). This is licensed to Abbott Labs (NYSE:ABT) for the US, Canada, and Mexico. Depomed could see potential sales milestones up to $300M and stands to receive $35-60M on approval depending on the labeling (they’re projecting $45-50M), DEPO’s financial outlook for 2011 could be off to a promising start. We believe that their Phase 3 results using DM-1796 are very supportive of approval and favorable labeling. DM-1796 offers patients, managed care and doctors added convenience(once-daily vs 2-4 times) and a decreased side effects profile. DM-1796 should be able to gain a substantial amount of the markets

There are several news events that investors should be looking out for over the next 1-2 quarters. Depomed hopes to conclude the investigation into the 500mg Glumetza recall and they’re currently projecting resupply in December or early 2011. Depomed is in discussions with several potential partners for the ex-US rights to DM-1796. They expect positive results in early 2011 for DM-1992, which they have had strong outside interest in. Depomed hopes to outlicense both DM-1992 and DM-3458 to partners in 2011. Carl Pelzel, CEO of Depomed, has also said that investors could potentially expect to see more Acuform XR metformin transactions -- similar to the Janssen and Merck (NYSE:MRK) deals. They expect to end 2010 with more than $70 million in cash and no debt.

Traders have already begun hedging their bets on FDA approval. Their March 2011 options have the most outstanding interest with 4700 $7.50 calls and 3300 puts at $5. Technically, the money flow index is at all-time highs and speaks to the demand for shares.

Disclosure: Long DEPO