Despite Abbott Parting With Gralise, Depomed's Future Looks Bright

by: Chimera Research Group

During the past week, Depomed (NASDAQ:DEPO) announced two significant business development updates. On March 15th, Depomed granted non-exclusive rights for its proprietary extended-release metformin patents, this time, to Boehringer Ingelheim. On March 16th, Depomed announced that they and Abbott (NYSE:ABT) have reached an agreement over Gralise.

Moving Forward From Abbott

The details of the agreement between Abbott and Depomed, were released in an SEC filing, after the market close. The filing provides for, the immediate termination of the previous agreement, a $40 million dollar payment to Depomed, and a transition plan for Gralise back to Depomed.

Many industry commentators have been puzzled by the negotiations between Abbott and Depomed. Some believe that Abbott's lack of interest is due in-part to Gralise's lack of "blockbuster" potential. Adam Feuerestien, a biotech columnist for, was puzzled about "how this is good thing" for Depomed?

At its face value, it's quite perplexing how a best-in-class product like Gralise would be dropped by Abbott. Yet, Gralise is clearly differentiated compared to other treatments for post-herpetic neuralgia. Gralise boasts a simpler dosing schedule than both Lyrica and Neurontin. It also comes in an easy titration pack, which allows for simple prescribing and dispensing for physicians and pharmacists, respectively. Gralise's adverse events profile is considerably tame, especially when compared to incumbent therapies. And Gralise is far less cumbersome to administer than Lidoderm and Qutenza.

To understand the nature of Abbott's lack of interest, I believe that analysts and commentators should look to reset their operational outlook to adjust for the changing landscape in the pharmaceutical sector.

Changing Pharmaceutical Landscape ...

According to Abbott's senior management, its acquisition of Solvay was driven by a desire to break into emerging markets, and not particularly for its U.S. pipeline. In fact, after its acquisition of Solvay, Abbott shed about 5,000 jobs with a majority from the Solvay division that originally licensed Depomed's Gralise in 2008. After Abbott's several restructuring initatives, it was left with no neurology or pain sales force in the United States. As Abbott continued to restructure, Gralise became less and less relevant to Abbott's stated goals and therapeutic interests.

Abbott's parting with Gralise has perplexed many industry experts, but probably not the pharmaceutical equity research team at Goldman Sachs (NYSE:GS). During, Pfizer's (NYSE:PFE) fourth quarter conference call, incoming CEO Ian Read mentioned that he is conducting a review of each of Pfizer's units, and hinted that Pfizer may be considering spin-offs, break-ups, or outright sales of non-strategic divisions. Goldman Sachs believes that if companies like Pfizer and Abbott were to divest and downsize non-pharma assets, it could results in a 25% price appreciation based on sum-of-the-parts valuation. Goldman believes that Pfizer and Abbott are both looking to divest their non-core assets to exploit the generous valuation that the market has awarded to consumer business, P/E of 17x versus 10x for pharmaceuticals.

Goldman believes that big pharma's previous diversification strategy has not been equitable. In its most recent update, Goldman Sachs mentioned that they believe companies like Pfizer and Abbott are looking to divest non-core assets and focus research and business development to synergistic therapeutic groups. Goldman cites Pfizer as a leader in restructuring, with its move to grow its pain portfolio and its publicly announced plans to consider restructuring. Goldman believes companies like Abbott and Merck (NYSE:MRK) will follow suit.

The era of conglomerated pharmaceutical companies may soon be replaced by focused research and marketing pharmaceuticals, much like Eli Lily (NYSE:LLY).

With these macro forces in mind, Abbott's non-interest in Gralise seems like a prudent move for the company and provides a viable scenario in which there is no need to question the potential of Gralise or purported lack thereof. It's that simple: pharmas like Abbott are looking to become more lean and focused, and Gralise was merely a non-strategic asset acquired via the Solvay buyout.

Depomed's Future

For several years, Depomed's management has repeated their stated goals to become a commercial specialty pharmaceutical company. The modus operandi was that Depomed would retain the rights to market several of its formulations to the women's health audience, with the hope that when Serada was approved, Depomed would already have an arsenal of products that were ready to market. Serada, has the potential to be the first non-hormonal treatment option for menopausal hot flashes.

With Gralise now returning to Depomed, it appears Mr. Pelzel and Depomed may be in a position to manifest their goals of becoming a commercially-oriented company, sooner than previously thought. And it's not like Depomed lacks commercial expertise. In 2008, Depomed hired and managed a sales force to augment Glumetza sales as the company transitioned partners from King (KG) to Santarus (NASDAQ:SNTS). The measure was an excellent stop-gap that helped maintain sales despite the absence of a more profound sales partner.

The company has stated that they believe they can market the product by the fourth quarter. Considering management's historical conservatism, the "fourth quarter" estimate may be somewhat generous. Furthermore, it's likely that Depomed doesn't want to communicate to competitors, like Pfizer, the nature of its marketing goals for competitive reasons.

Given the overall bearishness created by Abbott's exit, and given management's conservatism, I believe that investors may be in for a positive surprise. A partnership agreement and commercialization plans may be announced sooner than expected, a surprise both for investors and Depomed's comeptitors.

  • More information about Gralise, here
  • More information about Serada, here
  • More information about Depomed - Abbott Dispute, here
  • My previous articles, here

Disclosure: I am long DEPO, PFE, ABT, MRK, SNTS.