Depomed Flashes To New Low After Serada Setback

Oct.14.11 | About: Depomed Inc. (DEPO)

It has been an up and down sort of week for Depomed (NASDAQ:DEPO). After the positive news on Monday morning that it has finally launched Gralise to treat pain after shingles, last night came disappointing results from a pivotal trial of Serada in menopausal hot flashes.

Unfortunately for the Californian company the bad news is outweighing the good – shares fell 27% in early trade today to $4.60, a 12-month low, quickly wiping out the week's earlier gains. With Serada now likely to be scrapped, the pressure intensifies on Gralise meeting expectations. A slow uptake, which is blighting plenty of new product launches this year, could undermine sentiment further.

One short

Serada is an extended-release, oral formulation of gabapentin, the same ingredient in Gralise which gained FDA approval in January to treat postherpetic neuralgia (PHN), the pain following healing of rashes associated with shingles (Depomed gets gabapentin approval as Abbott spat looms, January 31, 2011).

Trial results released yesterday came from Breeze 3, the third phase III study of Serada to treat menopausal hot flashes which the company says affects around 75% of menopausal women in the U.S. The trial enrolled 600 women and compared a twice-daily dose of Serada to placebo.

Serada met three of four co-primary efficacy endpoints in reducing the severity and frequency of hot flashes. The severity endpoints at four and 12 weeks were met, as well as the frequency endpoint after four weeks. However, the drug failed to significantly reduce the frequency of flashes at 12 weeks, and also fell short on both secondary measures of frequency and severity at 24 weeks, the full treatment duration of the study.

On a conference call to discuss these trial results the company refused to provide any insight into how much the one primary and both secondary endpoints were missed. Having provided the specific p values for the endpoints that were met, the assumption must be that the misses were significant enough to raise serious doubts about whether the company will attempt to gain regulatory approval. The share price reaction today would tend to support this assumption.

Although Depomed says it will request a meeting with the FDA to discuss these results and possible ways forward, this is unlikely to be anything more than going through the necessary motions. Depomed’s chief medical officer, Michael Sweeney, admitted on the call that holding any ‘optimism’ on Serada’s chances was probably stretching it.

Pressure on Gralise

Increasing the pressure on Gralise to perform is probably the last thing the company wants as investors appear increasingly jittery about the uptake of new products, especially those which have struggled to prove the presence of a viable market opportunity.

Long-term partner Abbott Laboratories’ decision to terminate its commercial license to Gralise, preferring instead to pay a $40m settlement fee to Depomed, on top of a $48m milestone upon FDA approval, is a pretty damning indictment of Gralise’s perceived commercial potential.

The failure to secure a new marketing partner must also be a concern, which resulted in Depomed going it alone and formally launching Gralise this week with a sales force of 164 reps.

At least the payments from Abbott have left Depomed with a decent cash reserve with which to support the launch. The company held $114m in cash and equivalents at the end of June, as well as a further $50m in long-term marketable securities, offering an extra bit of security should it be required.

Current analyst consensus puts Gralise sales next year at $10m, rising to $134m by 2016. The share price fall today re-values Depomed at $274m, and after deducting the total cash reserve gives the company an enterprise value of around $110m. Depomed’s other marketed product Glumetza, an extended release formulation of the standard anti-diabetic agent metformin, is estimated to be worth $190m according to EvaluatePharma’s NPV Analyzer. This suggests investors are somewhat sceptical about Gralise’s commercial potential.

As such, Depomed needs Gralise to prove these doubters wrong for the shares to head north again – the ten-year high of $10 touched just after Gralise’s FDA approval in February now seems like a lifetime ago.