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Tuesday, Depomed (NASDAQ:DEPO) announced that Abbott (NYSE:ABT) is disputing elements of their contract regarding DM-1796, an investigational extended-release gabapentin formulation. According to the conference call and press release, CEO Carl Pelzel is "perplexed" by Abbott's last minute maneuvers and expressed haste in beginning the mediation process and, if needed, binding arbitration.

Issues with the contract

The issues are relatively unknown. Depomed received a letter from Abbott stating that Abbott believes they are no longer required to market DM-1796. The implied message from the press release and the conference call was that Abbott may not be content with the contract for DM-1796 or that it may be out of their therapeutic focus. Abbott inherited the agreement for DM-1796 from its recent acquisition of Solvay Pharmacueticals. During the conference call, Mr. Pelzel noted that Abbott has North American rights for DM-1796 only for pain states, including: post herpetic neuralgia (PDUFA date 1/30/11), diabetic peripheral neuropathy (Phase 2 completed) and fibromyalgia. It was also noted in the call, that Abbott does not own the rest-of-world rights or the rights for non-pain indications, like: restless leg syndrome, chronic migraines, epilepsy, or hot flashes (currently enrolling in a Phase 3 trial).

The story gets more complicated

Furthermore, Depomed simultaneously announced that DM-1796 has been given provisional orphan drug status by the FDA, and with it, 7 years of market exclusivity. Even with Orphan Drug Status for DM-1796, why does Abbott view DM-1796 as a poor fit? Do they feel short-handed? The answer may involve the topic of off-label use.

Anticonvulsants, and especially gabapentin, are typically used “off-label”, which means not for an FDA approved indication. Many of the estimates that various analysts have used to quantify a market potential for DM-1796 have included generic gabapentin and Lyrica sales & scripts. But, other estimates have demonstrated that only 20% of those sales are for FDA approved indications. That means that the majority of sales for this class of drug comes from off-label use.

Abbott may have banked on the fact that some physicians would naturally migrate from the use of Lyrica and generic gabapentin to DM-1796, owing to its convenient dosing and its tame side effects profile. Under the current agreement, Depomed could hypothetically partner its gabapentin formulation with another pharmaceutical company for another indication, and the results would be that both Abbott and the hypothetical partner would be fighting for the same off-label scripts. Even Serada, Depomed's investigational drug for the treatment of hot flashes, could potentially be used off-label as a competitor to DM-1796. This may not be competition that Abbott is willing to compete against. Furthermore, due to widespread abuses, off-label sales are now more tightly regulated, making those lofty sales projections for DM-1796 somewhat less attainable.

Depomed has an excellent litigation track record

Even if Abbott inherited a crappy contract, that doesn’t mean they can snub it and move on. Depomed has an incredible litigation track record, dealing with patent and contract issues of this kind. All of Depomed’s legal history has ended in its own favor, bringing in cash settlements from; Bristol Myers Squibb (NYSE:BMY), Biovail (BVF), Esprit (now (NYSE:AGN)), King (KG), and Teva (NYSE:TEVA). In August, Depomed was one of the few pharmaceutical companies that evaded a gabapentin manufacturing lawsuit with Pfizer (NYSE:PFE).

During Tuesday’s conference call, Depomed’s CEO implied that the costs to Abbott to exit the deal could be more than $100 million, not including the roughly $50 million dollar milestones due on NDA approval. Furthemore, Mr. Pelzel reassured investors that DM-1796 launch date would not be delayed, if approved.

Trade name leaked by FDA

In a previous article, I purported that the tradename for DM-1796 could have been GRALISE. It has come to my attention that the actual name could be GAPREZA.

Final Thoughts

It’s clear that more uncertainty has entered the picture. But there may be an opportunity here. From an after-hours low in the mid 4’s, Depomed stock price has climbed to almost 6 dollars. Clearly, someone sees an opportunity here, not only me.

Disclosure: I am long DEPO, ABT, Merck (NYSE:MRK), Santarus (NASDAQ:SNTS), Bionovo (OTC:BNVI), DURECT (NASDAQ:DRRX), PFE.

Source: Finding Opportunity in Abbott - Depomed Dispute