Looking At DepoMed's Serada For Hot Flashes

| About: Depomed Inc. (DEPO)

On July 31, 2012, DepoMed (NASDAQ:DEPO) submitted a New Drug Application (NDA) for Serada to the U.S. FDA. Serada is DepoMed's proprietary extended release formulation of gabapentin in development for the treatment of menopausal hot flashes. The news follows a Type-B "pre-NDA" meeting between DepoMed and the FDA in April 2012. Following that meeting, management believed the data from the BREEZE-1, -2, and -3 trials "warrants submission of an NDA for the FDA's review and considering." We expect the FDA to formally accept the application on October 12th or 15th (note 74 days would be Saturday, October 13th).

This morning (October 3, 2012), DepoMed announced that it plans to present two abstracts from the third phase III trial with Serada, dubbed BREEZE-3, at the North American Menopause Society annual meeting, taking place between October 3rd and 6th, in Orlando, Florida. We note that data from BREEZE-1 and BREEZE-2 was previously presented at the NAMS meeting in October 2010. Below we summarize the data on Serada to date, and discuss the potential market opportunity for the drug should the FDA grant approval in late May 2013.

…The BREEZE Data…

In total, DepoMed has studied Serada in approximately 1,700 post-menopausal women suffering from hot flash. Each trial was a randomized, double-blind, placebo-controlled study of the drug's effectiveness in post-menopausal women experiencing moderate-to-severe hot flashes each day. Patients were randomized into one of two treatment arms, with patients receiving either placebo or a total dose of 1800mg of Serada dosed as 600mg in the morning and 1200mg in the evening. The co-primary efficacy endpoints in each study were reductions in the mean frequency of moderate-to-severe hot flashes, and the average severity of hot flashes, measured after four and 12 weeks of stable treatment. The BREEZE-1 and BREEZE-3 trials included a persistent efficacy analysis after 24 weeks.

Data from BREEZE-1 and BREEZE-2 were analyzed using a parametric ANCOVA analysis. ANCOVA analysis is used when sampling is expected to be random, and the distribution of data is expected to be normal and homogeneous. Unfortunately for DepoMed, this was not the case. The population in BREEZE-1 and BREEZE-2 was skewed due to outliers on the high-end, specifically with respect to frequency of hot flashes per day. Nevertheless, the trials came close to achieving statistical significance using a p-value of 0.05. Below is the data from BREEZE-1 and BREEZE-2.

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For BREEZE-3, management entered into a special protocol assessment (SPA) with the U.S. FDA to analyze the data using a non-parametric analysis. We believe this was done in an attempt to combat the skewed data issue noted above with the first two trials. However, DepoMed also altered the trial design for BREEZE-3. The company employed a two-week run in period to prior to randomization, rather than one week to better standardize the baseline. The protocol also called for limited patient interactions to minimize caregiver impact and placebo response. As enrollment and standardization in the trial improved, the data became more normal and homogeneous.

When management presented the data from BREEZE-3 in October 2011, the company noted that frequency at week 4 was met (p=0.0003), as were severity at both week 4 (p<0.0001) and week 12 (p=0.0102). Results were not statistically significant for reduction in average frequency of hot flashes at 12 weeks (p=0.10), nor where the results statistically significant at 24 weeks for the reduction of hot flash frequency (p=0.2351) or severity (p=0.1510).

However, when the company went back and analyzed the data from BREEZE-3 using the same parametric ANCOVA analysis conducted on BREEZE-1 and BREEZE-2, the results were statistically significant for all endpoints.

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Additionally, significantly more women said their symptoms improved with Serada at 12 weeks (68% vs. 54% with placebo; p<0.0036) and 24 weeks (74% vs. 54% with placebo; p<0.0001). Management also conducted an analysis of Serada's impact on sleep. Though not a primary endpoint, the analysis yields some encouraging results.

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Overall, Serada was well tolerated. Five percent more patients on Serada than placebo withdrew from the trial due to adverse events (16.7% vs. 11.5%, respectively). The most common adverse events were headache (9% vs. 8% placebo), daytime sleepiness, or somnolence (6% vs. 3% placebo), upper respiratory tract infections (6% vs. 4% placebo), and dizziness (13% vs. 3% placebo), which are the most bothersome side effects commonly associated with gabapentin. Of note, both treatment arms reported minimal changes in weight over the 24-week arm.

…Chance At Approval…

At this point, we don't know what to think about Serada. BREEZE-3 failed under the protocol designed and agreed upon under the special protocol assessment. BREEZE-1 and -2 also failed using a p-value of 0.025 and ANCOVA analysis. If we flip the analysis on BREEZE-3 to ANCOVA, BREEZE-3 was a success. In fact, looking at all the data and using a p-value of less than 0.05 and ANCOVA analysis, we see that Serada hit 10 of the required 12 primary endpoints, including all endpoints for both frequency and severity at week 4. However, the data is still lacking with respect to the frequency endpoint at week 12 and mixed with respect to the persistent efficacy at week 24. Perhaps additional analysis at the North American Menopause Society meeting will help clear things up.

Management has noted that the new drug application includes both parametric and non-parametric analysis, a responder analysis, and a meta-analysis that included the combined data from all three programs together. As noted above, we expect the NDA to be accepted by the U.S. FDA on October 12th or 15th. We remind investors that the NDA cost DepoMed around $5 million to file. This included the filing fee (~$1.8M), a milestone to license partner PharmaNova (~$1M), external consulting expenses, manufacturing test batches, and other launch preparations.

We anticipate that the FDA will hold an Advisory Committee meeting on Serada. The PDUFA should be scheduled for late May 2013. That would potentially put an advisory panel meeting on the drug sometime around March or April 2013. We think the drug has a better chance at a positive recommendation from the Advisory Committee than in final approval from the FDA, but at this point we see evidence to support all outcomes. Our "50/50" call is admittedly a cop-out, but we expect to move the needle in one direction when the decision nears, or after we've had more time to analyze the data presented at NAMS.

The Serada Opportunity

Hormone replacement therapy (HRT) is currently the only FDA-approved single-agent therapy for the treatment of menopausal hot flashes. In 2003, prescriptions for HRT products, specifically Wyeth's Premarin, dropped dramatically following the National Institutes of Health's decision to halt a large-scale clinical study of HRT due to preliminary results suggesting a correlation between HRT and increased risk of breast cancer and cardiovascular disease. Results from these Women's Health Initiative (WHI) trials in 2003 caused HRT prescriptions to decline by 60% from 2001 levels. Primary-care physicians (PCP) and Ob/Gyn's dramatically reduced their use of HRT products during the last decade. This created a significant void in the market and creates an opportunity for a new non-hormonal treatment such as Serada.

That being said, HRT remains the standard of care. Earlier in 2012, NAMS put out updated guidance on the use of HRT in women suffering from hot flashes. The position statement notes that a combination of estrogen plus progestin therapy (EPT) remains the most effective treatment available for menopausal symptoms, including hot flashes and night sweats that can interrupt sleep and impair quality of life. NAMS believes that the majority of women can take EPT safely, for periods up to three to five years, with little risk of heart attack, stroke, blood clots, or breast cancer. For women with pre-existing risk, an alternative therapy may be more desirable.

As a result, we expect that these updated guidelines from NAMS will have a negative impact on the overall market potential for Serada if approved. We see Serada relegated to a second-line therapy for women where HT is either not effective or not desirable. Analysis clearly shows a void in the market, but we believe the void is for second-line treatments, not for a new standard of care.

According to Breastcancer.org, 80% of the women in the U.S. (~32 million) experience hot flashes of some kind as they approach menopause, and for the first year or two after their periods stop. Between 25% and 50% of women continue to have them for many more years. About 30% (10 million) seek medical treatment. That's a big market, and presents a big opportunity for DepoMed, even in a second-line role. But just how effective a drug is Serada?

As we look at the data from the BREEZE trials, we see that the placebo showed a 58% average (62% in B-1 and 55% in B-2) reduction in hot flash frequency at week 12. Serada showed a 66% reduction in both trials at week 12. That's 66% vs. 58%, or around a 14% improvement. For severity at week 12, the placebo showed a 26% reduction (28% in B-1 and 24% in B-2). Serada showed a 34% average reduction (32% in B-1 and 36% in B-2). That's 34% vs. 26%, or around a 31% improvement. Responder analysis from BREEZE-3 showed a 68% improvement in symptoms for Serada vs. 54% for the placebo at week 12. That's a 26% improvement. By week 24, the numbers get more impressive, 74% for Serada vs. 54% for the placebo, or a 37% improvement.

We would not classify any of the above data as a "Home Run". After-all, women can expect a greater than 50% chance at improvement in symptoms by simply taking a sugar pill. Nevertheless, the data are interesting enough that we believe some PCP / ObGyn doctors will prescribe the drug. The sleep data is interesting, but we wonder if that is simply a side-effect of gabapentin, known to cause sleepiness and somnolence. Data from BREEZE-1 and BREEZE-2 showed a 8-19% incidence of somnolence at the 1800mg dose. In BREEZE-3, somnolence was only 6%. Somnolence for the placebo was 2-3% in all three BREEZE trials. Dizziness, a known side-effect of gabapentin, seems to be the most common adverse event women can expect on Serada. Data from BREEZE-1 and BREEZE-2 showed a 19% incidence of dizziness. In BREEZE-3, the number dropped to 13% (vs. 3% for the placebo in all three trials).

Of the 10 million women seeking medical treatment for hot flashes, we suspect that 90% are eligible and adequately treated by HRT. According to an article published in the Journal of Clinical Oncology (March 30, 2009), HRT reduces hot flash symptoms by 80-90%. As noted above, we do not expect Serada to overtake HRT as the first-line treatment. Serada will battle for second-line use in the remaining one million women with off-label antidepressants, including paroxetine, venlafaxine, fluoxetine, and sertraline. We think Serada data compares well to these drugs. Analysis of the BREEZE-3 data to Pfizer's phase 3 data with Pristiq (desvenlafaxine) shows Serada to be at the very least equal on reduction in frequency and potentially superior on reduction in severity. Therefore, we believe Serada could capture as much as 20% market share in these one million women seeking alternative treatment options.

If we assume that DepoMed will charge a similar price for Serada to the approved Gralise ($2.25 per 600mg tablet), and that a typical course of treatment is around 9 months, we arrive at a peak sales estimate of $365 million for Serada.

==> 10M women seeking treatment x 10% seeking alternative to HRT x 20% market share x ~$1,800 per year cost = $365 million peak sales opportunity.

We expect that DepoMed would like to be involved in the promotion of Serada to high-prescribing Ob/Gyn's in the U.S. Management noted that there are about 18,000 of these high-prescribing OBGs. We suspect that effective promotion can be accomplished by a small field force of 40 to 60 representatives. If approved, we suspect that it will take DepoMed seven years to achieve peak sales (2020). Plugging these numbers into our model, along with a 50% chance at approval and a 15% discount rate back to present data, and we arrive at a value for Serada of around $3 per share.

We believe the market currently assigns zero value for Serada to the valuation of DepoMed. That presents opportunity in our view considering we model the existing cash, royalties on Glumetza, profits from Gralise and Zipsor, and intellectual property and licensing worth $9 per share alone...but that's the subject of another article.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I am an employee of Zacks Investment Research. For additional information on DepoMed, Inc. and/or Zacks, please visit SCR.Zacks.com.