Depomed's Recent Events Boost Balance Sheet

Includes: ABT, DEPO
by: Steven Breazzano

Upcoming events: Top-line data for phase 3 “Breeze” trial expected 4Q 2011. Possible partnerships and upfront payments throughout 2011.

Depomed (NASDAQ:DEPO) – based in Menlo Park, California, engages in the development of enhanced pharmaceuticals to improve the efficacy, convenience and safety of existing treatments. Utilizing its proprietary AcuForm technology, the company aims to leverage this platform to provide enhanced therapeutics.

Recently, all the pieces seemed to be coming together for DEPO:

  1. Gralise (formerly DM-1796) received approval from the FDA (triggering a $48 MM payment from ABT).
  2. Glumetza resumed 500 mg doses.
  3. Depomed's Acuform® gastric retentive drug delivery technology was licensed to Boehringer Ingelheim (for the development and commercialization of certain fixed dose combination product(s) which include extended release metformin and proprietary Boehringer Ingelheim compound(s) in development for type 2 diabetes).
  4. The Breeze 3 trial completed enrollment (600 patients).
  5. Favorable phase 1 trial results were announced for Parkinson’s (significant unmet need).
  6. DEPO announced its 3rd consecutive profitable quarter.
  7. Milestone payments were received from Merck (NYSE:MRK), Covidian, and Janssen.

Most recently though and of primary concern to investors, Abbot (NYSE:ABT) and Depomed have reached an agreement concerning the terminated licensing agreement for Gralise. Pulled from the 10-k recently filed with the SEC:

“Pursuant to a settlement agreement entered into in March 2011, we [DEPO] and Abbott Products terminated our license agreement for Gralise. The settlement agreement provided for (i) the transition of Gralise back to Depomed and (ii) a $40.0 million payment to Depomed to be made in March 2011.”

Now what? Depomed’s options include licensing out to another partner, going it alone, or co-promoting. Ultimately, due to the fact that many firms have in place sales forces for pain management and Gralise is a superior product (with labeling to reflect this) to generic gabapentin, I believe Depomed will license out the product and find willing partners.

Financial Position: The company’s position is currently strong with approximately $77 MM in cash and securities on the balance sheet at the end of 2010. From the conference call, DEPO anticipates operating expenses over the next 12 months to total $42-27 MM (SG&A, R&D) and 12/31/2011 cash of $85-90 MM (including $48 MM from ABT and $3 MM from Santarus). Historically, cash guidance has been conservative and further licensing deals will continue to provide upside revisions (e.g. the $10 MM license from Boehringer Ingelheim and $40 MM from the settlement with ABT are not reflected in that estimate). Management also included guidance of $13-15 MM of profit from sales of Glumetza. Depo’s stated goal is to “achieve sustainable profitability from recurring operating revenue from our own specialty pharmaceutical business,” and I believe the company is within a stone’s throw.

Additional Risk Factors: During the 4Q 2010 conference call, DEPO’s management brought up the issue of orphan drug designation. Pulled from the 10-k, the quote below merits closer examination:

“In November 2010, the FDA granted Gralise Orphan Drug designation for management of postherpetic neuralgia, based on the size of the postherpetic neuralgia population and the reduced incidence of adverse events observed in Gralise clinical trials relative to the incidence of adverse events reported in the package insert for immediate release gabapentin. In February 2011, we were informed that additional submissions or evidence to demonstrate the clinical superiority of Gralise based on improved safety will be required to be provided to the FDA to obtain a seven-year period of market exclusivity in postherpetic neuralgia as a result of the orphan drug designation. If obtained, the market exclusivity period will run from January 28, 2011, the date the FDA approved the Gralise NDA.”

Although the designation was granted after the completion of all clinical trials, it is not immediately clear what will be necessary to remedy this (the conversation was between Abbot and the FDA). Furthermore, precedence for this scenario is lacking, so supplying an accurate time-table is not possible.

Another potential risk factor is the ongoing Breeze 3 trial, the 3rd phase trial for the treatment of menopausal hot flashes. The previous trials failed to meet all of their primary endpoints. While this study has been redesigned to minimize some of the weaknesses of the previous trials and is done under an SPA with the FDA, success is far from guaranteed.

Conclusion and Future Directions: In the long term, I have a favorable opinion of DEPO’s proprietary technology and believe that current blockbusters coming off patent will be a source of growth for DEPO, in addition to the strong pipeline [DM-3458 (GERD-compound), Serada, and DM-1992 (Parkinson’s)]. Furthermore, I view the commercial success of Glumetza favorably and believe it will continue to gain market share, providing a stable revenue source. While near-term uncertainty remains with the future of Gralise and the outcome of the Breeze 3 trial, the $40 MM settlement and the $48 MM milestone payments from Abbott along with additional licenses significantly strengthen the balance sheet and provide DEPO with the financial flexibility to grow.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.