Depomed Plunges After Serada Results: Still An Attractive Buying Opportunity

| About: Depomed Inc. (DEPO)

On October 13th, Depomed (NASDAQ:DEPO) announced results from it’s Phase 3 trial, called BREEZE 3, testing Serada, an extended release gabapentin formulation for the use in post menopausal hot flashes. The trial failed to meet 1 of 4 primary endpoints, and failed to meet its key secondary endpoints.

Below is an excerpt from Depomed's press release:

The co-primary efficacy endpoints in the study were reductions in the average daily frequency and severity of moderate-to-severe hot flashes, measured after four and 12 weeks of treatment using a non-parametric statistical analysis. The treatment duration of the study was 24 weeks.

The primary severity endpoints were achieved with statistical significance at four weeks (p < 0.001) and 12 weeks (p < 0.01). The frequency endpoint at four weeks was achieved with statistical significance (p < 0.001). The frequency endpoint at 12 weeks, as well the key secondary frequency and severity endpoints at 24 weeks, were not met.

Serada was generally well tolerated in BREEZE 3. The most common adverse events were dizziness and somnolence. The incidence of dizziness in the active arm was 12.7% compared to 3.4% for the placebo arm. Somnolence was 6.0% in the active arm compared to 2.7% in the placebo arm. Withdrawals due to adverse events in the active arm were 17%, compared to 12% in the placebo arm.

These results were in line with our predictions.

Below is a summary from my recent Catalyst Evaluation for Chimera Research Group:

  • We estimate that BREEZE 3 has a 35-40% chance of statistically significant results through 4, 12 and 24 weeks.
  • We estimate that BREEZE 3 has a 35-40% chance of statistically significant results through 4 & 12 weeks, but only clinically significant results at 24 weeks.
  • We estimate that BREEZE 3 has a 20-30% chance that either the 4 or 12 will not be statistically significant or that the 24 week endpoint will not display any meaningful persistence of efficacy
Below is a summary from a corresponding Trade Idea by Tony Pelz for Chimera Research Group:
  • Our analysis suggests a 35-40% probability of positive outcome for all endpoints
  • An expected share price move from $1.00 to $3.00 from current levels of around $5.00.
  • On poor results, we expect a price drop into the $3.00 to $4.00 range
  • The company’s solid cash position and value from other products will likely limit further declines in the shares
  • Under such a scenario, we would view DEPO at a strong long term Buy.

Our prediction was that the market would unusually punish Depomed and create an attractive buying opportunity. In fact, our oultined options trade was designed to be profitable with a PPS over $4. Likewise, our long term bullishness has not changed and is based on a sizable cash position, continued success with Glumetza, and a modest launch for Gralise. Also at this price point, you can essentially play any potential positive outcomes regarding Serada’s regulatory process, at no cost.

According to Depomed's CMO, Dr. Sweeney, there has been one other precedent in recent history where a pharmacotherapy's application was accepted for review by the FDA under similar circumstances, with only some primary endpoints meeting statistical significance. He reiterated that the company was not optimistic about a positive regulatory outcome. We agree with management and we view the probability of regulatory approval being very low, but remotely possible, given the depth of data Depomed could submit.

In September, Pfizer (NYSE:PFE) announced that it received a CRL from the FDA about its application for Pristiq for the hot flash indication. According to Pfizer Media Relations, Pfizer is evaluating the contents of the CRL and plans further discussion with the FDA. Pfizer indicated that according to the FDA, the data included in the application was not sufficient to establish an acceptable risk/benefit profile. Pfizer, like Depomed, is also seeking a meeting with the FDA to discuss a path forward within the coming months.

Some bullish investors have suggested a possibility that Depomed would seek an indication for "short term relief" as the 4 week endpoints have been statistically significant through all trials. We find this possibility highly unlikely, given the guidance to industry clearly states the required 4 and 12 week endpoints.

Furthermore, the FDA has consistently asked pharmaceutical companies for more lengthy data. Pfizer's phase 3 trial for Pristiq was a 12 month duration. Likewise, Noven's phase 3 trial for Mesafem had a 24 week duration. Bionovo's (OTC:BNVI) phase 3 trial for Menerba will be 12 months, as well.

We find it hard to reconcile the FDA's requests for more lengthy data, and simultaneously accept the idea that the FDA would allow an application that does not even meet the 4 and 12 week primary endpoints listed in the 'Guidance to Industry'. We also find it unlikely that the FDA will allow a retroactive analysis of the data for Serada's application, considering both the FDA historic viewpoints and the fact that the hot flash indication is a quality of life issue, and not a condition with a mortality outcome.

Investors in the sector should also be aware of several upcoming catalysts. Noven, a subsidiary of Hisamitsu Pharmaceutical (OTC:HTSUF), is slated to report results from its Phase 3 trial for Mesafem. Likewise, Bionovo is slated to begin a Phase 3 trial for Menerba in this quarter.

Disclosure: I am long DEPO, PFE.